What may have saved the Tories from a general election in 2007 was the promise made by shadow chancellor George Osborne last week to raise the threshold for inheritance tax from £300,000 to £1 million.
An ICM poll last Sunday showed the Tories leading Labour by 44 to 38 percent in 83 key marginal seats – enough to cost Gordon Brown his Commons majority. “If you look closely at the marginals, you will see that inheritance tax is cutting through,” a Labour Party source told the Observer.
What was New Labour’s response to Osborne’s promise? Not to defend inheritance tax but to claim that the Tories’ sums didn’t add up and even to suggest they might raise the threshold themselves.
This shouldn’t be too much of a surprise. As chancellor of the exchequer and as prime minister, Brown has presided over a society where the gap between rich and poor has deepened and become entrenched.
Inheritance tax in its modern form was introduced in 1894 by the Liberal chancellor of the exchequer, Sir William Harcourt. Harcourt belonged to the left wing of the Liberal Party and wanted to use tax to redistribute wealth from rich to poor.
The Tories, who have taken up the US Republican right’s campaign against the “death tax”, claim that this agenda is now obsolete. They say inheritance tax hits the prosperous middle of society.
The very small kernel of truth in this argument is that the housing bubble that has driven up property prices on both sides of the Atlantic has increased the number of estates that are liable to inheritance tax.
The US bubble has now burst and, according to Financial Times columnist Martin Wolf, “in several respects, the UK looks more exposed to a housing-induced correction than the US”. For example, “UK mortgage debt was 126 percent of gross domestic product at the end of last year, against 104 percent in the US”.
Why shouldn’t households that have been enriched through no action of their own, but due to financial speculation driving up the price of their homes, be expected to share this with the state?
This question has dominated the debate, but in a way it’s a side issue. Harcourt’s target of the old landed aristocracy may be much weaker today.
But now we have a plutocracy – an aristocracy of the rich, whose fortunes have been bloated beyond imagination, largely thanks to their role in driving that same global engine of financial speculation. Notoriously, it is exactly this group that are very effective in avoiding taxation.
In June Nicholas Ferguson, a leading figure in the British private equity industry, pointed out that hedge fund and private equity executives are often able to pay tax at a rate of 10 percent – “Any common sense person would say that a highly paid private equity executive paying less than a cleaning lady... can’t be right.”
Remedying this state of affairs requires much tougher and more progressive taxation, including on estates. This isn’t a matter of envy, but of justice.
Redistributive taxation is essential to improving the condition of the poor. Even the present, very imperfect tax and benefit system significantly narrows the difference between incomes after tax.
Both Tories and New Labour alike denounce higher taxation in part because it will threaten London’s status as a haven for the world’s ultra-rich. Many might see this as an additional benefit.
Even some billionaires defend the “death tax”. Warren Buffet, one of the richest men in the world, wants it set at 100 percent and has pledged to give away the whole of his fortune before he dies.
Inheritance tax isn’t a very radical idea. People like Buffet support it because it would create a level playing field for market competition. So why are the politicians so scared of it?