The Conservatives have become a high-tax party. That levels of levy in Britain were going from the OECD’s bottom third to its top half – reaching their highest point since the early 1950s – underpinned last year’s leadership election. Presiding over these hikes as Chancellor made Rishi Sunak vulnerable; pledging to reverse them was central to Liz Truss’s appeal to Conservative members.
Truss and Kwasi Kwarteng’s attempt to repackage Anthony Barber for the TikTok generation floundered amidst concerns over spending, market turmoil, and woeful communication. Jeremy Hunt’s first act upon entering the Treasury was to junk almost all of his predecessor’s agenda. Under Sunak, the need to keep the markets calm has rendered talk of tax cuts verboten.
But after a year of batting himself in, the Prime Minister is ready to go on the front foot and put some clear blue water between himself and Labour. Junking various parts of the Net Zero agenda seems already to have provided a little flurry in the polls. With the Conservative Party Conference just around the corner, now would be the perfect opportunity to promise reductions.
With borrowing slightly lower and revenues slightly higher than previously expected, Sunak and Hunt might think they have sufficient wiggle room, whatever their public statements. But which tax to cut? The Truss example teaches two major lessons.
First, any reduction should be relatively inexpensive, so as not to spook the markets. Second, it should be something popular that Keir Starmer would struggle to copy. Last year, Labour happily pledged to reverse the unpopular junking of the 45p tax rate but keep the cut to the basic rate.
A tax cut that is cheap, popular, and won’t be reversed by Labour? Sounds too good to be true. Yet Downing Street has apparently found one: inheritance tax.
Inheritance tax cuts have an Augustinian relationship with Conservative financial thinking. George Osborne famously spooked Gordon Brown into swerving an election in 2007 by pledging to raise the threshold to £1 million. Scrapping at least parts of it gets an airing from the Daily Telegraph whenever the Princess of Wales isn’t wearing anything interesting.
The Prime Minister’s officials apparently believe it’s “the most hated tax in Britain”. This isn’t tabloid hyperbole: a 2021 Opinium Poll found that 24 per cent thought of inheritance tax as their most disliked levy, ahead of income tax and VAT.
An Ipsos poll earlier this year also found inheritance tax was considered unfair by more voters than any other levy. This perception stems from the idea that it both taxes aspiration – penalising the dead for what they accumulate during their lives – and the same money twice, since an inheritance comes from income that has already been taxed.
The system is also riddled with loopholes. The TaxPayer’s Alliance once suggested it accounts for 10 per cent of the UK’s tax code, despite raising under one per cent of government revenues. It is more easily avoided by the rich than the poor. Frozen thresholds are dragging more into paying it: revenues are up £300 million on last year.
Most pleasing to Sunak and Hunt’s Treasury Brains, however, will be that inheritance tax would be a relatively inexpensive to cut. Junking it would reportedly cost £7 billion – just over half the expense of cutting the basic rate of income tax by up to 2p. Borrowing costs remain high. But sufficient wiggle room apparently exists.
Yet if wiggle room exists for tax cuts – and if the argument for some form of tax dividing line with Labour is so obvious – the question must be asked: is inheritance tax really the right tax to be junking?
For one thing, its unpopularity is based on a misconception by many voters as to whether they will actually have to pay. Recent Treasury figures suggest only five per cent of estates pay the levy, but polling suggests upwards of 30 per cent of voters think their assets will be sufficient to incur inheritance tax when they die.
Sunak and Hunt could shrug their shoulders and say it’s not their fault if the average punter isn’t sure what he or she owes to HMRC. But if we are suggesting there is leeway for cuts, wouldn’t it be wiser to use it for a reduction that affects a greater number of voters or boosts the economy?
An obvious candidate emerges: stamp duty. Introduced to finance war with France in 1694, it is widely regarded as one of the UK’s stupidest taxes. It creates bottlenecks in the housing market, preventing older homeowners from downsizing whilst further frustrating the efforts of the young to settle down.
At a time when the housing crisis lives rent-free in the mind of the average Twitter addict, and as the economy stutters on the edge of a recession, cutting stamp duty is a logical way of both easing labour mobility and juicing the housing market. The Government has already abolished the levy for those first-time buyers paying £300,000 or less for a residential property.
Sunak also has personal experience of the benefits of a stamp duty cut. His stamp duty holiday during the pandemic boosted sales by 53 per cent compared to a year earlier. It also increased revenue, since he left the tax in place for sales on properties over £500,000 – a more effective demonstration of the principles of Arthur Laffer than anything Liz Truss could conjure up.
Our friends at Onward have suggested abolishing stamp duty on all purchases under £500,000, and halving rates on transactions above that. This would remove the tax from nine-tenths of owner-occupiers. They suggest this would cost £3.3 billion and propose a series of new levies to make the policy effectively revenue-neutral.
Since the tax code is still several times longer than the King James Bible, we can park those new taxes for the time being. We can also avoid suggesting a cut might raise more revenue than it would cost since the Treasury hasn’t always found that argument acceptable.
Instead, just look at the basic politics. Labour will portray any proposal by Sunak to junk inheritance tax as a sop to those just as wealthy as himself. Unfair? Perhaps. But one cannot be sure of the traction it might have during a cost-of-living crisis. By contrast, helping the young get on the housing ladder is hardly something they can oppose – even if it raises the prospect of Starmer nicking it.
Yet if that doesn’t take the Prime Minister’s fancy, there is an even more obvious reduction to make. He could restore the 1p cut to income tax from spring next year that he had originally touted in his 2022 Budget. Having been brought forward by Kwarteng autumn of that year, it was a victim of the clean-up operation after the mini-Budget.
The Institute for Public Policy Research estimated the cut would cost £5.2 billion in July last year. With the rise in borrowing costs, that might well be more expensive. But it would be beyond the ballpark of the figure touted for abolishing inheritance tax. It would help a far greater number of voters and allow Sunak to suggest the hard medicine of the last year is starting to bring a recovery.
Tax cuts will always be difficult. The inexorable rise in state spending caused by demographic decline, our persistent post-crash low growth, and the serial unwillingness of Tory MPs to cut spending always means the freedom available to the Treasury is slight.
But if the latter of those remains an eternal verity, we could at least try and do something about the first couple. Hence why we should seek to reduce the demand for government – and why the Town and Country Planning Act should finally be destroyed.