Nobody in politics ever thanks you for something you have already done. Hence why Rishi Sunak is grumbling that he isn’t receiving sufficient credit from voters for Saturday’s rollout of his £9 billion National Insurance cut. But that’s because focus has already shifted onto working out which levy Jeremy Hunt can slash next. The Telegraph suggests Downing Street is thinking of Inheritance Tax (IHT). The Times says Income.
The debate is one with which ConHome readers should be familiar: the excise equivalent of the Bairstow vs Foakes row from last summer’s Ashes. Mandy Rice-Davies rules apply to the Telegraph‘s IHT coverage, since the paper is campaigning for its abolition. I have counted 30 articles and op-eds to that effect since July. Liz Truss has joined around 50 MPs in calling for it to be scrapped.
The argument runs that slashing IHT would be both popular and cheap – basic requirments for any pre-election Budget giveaway. Despite our rate of 40 per cent being unusually high by international standards, IHT only raises £7 billion, which is under one per cent of the Government’s total income. The Institute for Fiscal Studies has suggested abolishing it would be less inflationary than other tax cuts as beneficiaries are more likely to bank the money than spend it.
Proponents of abolition also argue that the “death tax” is disliked by voters. They point to George Osborne spooking Gordon Brown out an election back in 2007 by pledging to raise its threshold. Despite that pledge, as Annabel Denham has highlighted, it has remained frozen at £325,000 since 2009. Rising house prices are dragging a growing number into paying it. One in eight taxpayers are expected to do so in the next decade.
Leave the politics aside, IHT’s detractors treat it as a particularly immoral levy. They claim it represents the ‘double taxation’ of money already taxed in life, and that it challenges our natural aspiration to pass something on to our children. This isn’t only a preoccupation of the idle rich: half of those asked agreed that ‘inheritances should always be completely tax-free?’ when asked by Demos.
The theorising runs that an IHT cut would be harder for Labour to match. With the tax burden heading towards its highest level in seven decades, reducing IHT could thus form the centrepiece for a distinctly Tory economic pitch. If social-democratic Norway and Sweden can abolish the death tax, why can’t a Britain supposedly under a centre-right government?
Yet readers of my previous ToryDiarys on this theme will be unsurprised to hear I’m unconvinced. Far from being a readily available electoral slam dunk, prioritising an IHT cut in the Budget would be both electorally and economically unwise. Hunt’s priority should still be cutting income tax – or stamp duty, as I have argued previously. Then again, one should ask if he should even be cutting taxes at all.
An IHT cut would not so much be a pitch for a fifth term in office, but an admission of defeat across the Red Wall and beyond. Voters may say they dislike it. But present them with specifics, and three-quarters believe inheritance should be taxed at some level – a figure that holds for both Conservative and Labour voters.
Polling suggests those most likely to want IHT thresholds increased are those on higher incomes and concentrated in the south of England. Unsurprisingly, London and the South East are where rising house prices have hauled the greatest number of newly bereaved families into paying. One suspects this includes a disproportionate number of Telegraph readers.
Despite Ed Davey’s best efforts, we still expect to southern England to be one of the few places left voting Conservative t the next election. An IHT cut would be a desperate eleventh-hour bung to the core Tory vote. Only four per cent of estates pay IHT. Claims that a much larger chunk of the electorate want it scrapped rely on wishful thinking about the average Briton’s aspirational instincts.
Polling for Ipsos suggests 44 per cent would opt for an Income Tax cut on those earning below £50,000. 34 per cent would choose council tax, 26 per cent VAT, 20 per cent fuel duty, and 19 per cent National Insurance. During a cost-of-living squeeze, taxpayers are more interested in their immediate incomes than those of their future heirs. If they really cared about the young, they’d want the Triple Lock abandoned, and some more houses built.
Freezing Income Tax and National Insurance thresholds has hauled millions into paying higher rates through fiscal drag. The Office for Budget Responsibility calculated 3.2 million more would be pulled into paying Income Tax by 2027-2028. Abolishing taxes for the wealthiest whilst squeezing those on lower incomes embodies an almost pantomime version of Toryism – especially when the cuts are introduced by two of Parliament’s richest MPs.
Sunak and Hunt thus seem to be rowing back on doing away with IHT, with reports suggesting a 1 or 2p reduction of income tax is more likely. Cutting the basic rate would cost around between £6 and £7 billion – less than the abolition of Inheritance Tax. Sunak penciled in such a cut for early 2024 as Chancellor, but Hunt junked it following the Mini-Budget. Reintroducing the cut now would suit their narrative that earlier prudence has enabled a little loosening of our national corset.
Yet even that is difficult to swallow. Despite our soaring tax burden, Britain still borrowed £124 billion last year. Debt interest payments are the equivalent of our second largest government department; our deficit is substantial enough to prompt one to ask what ‘austerity’ was really for, other than to lump Ministers with the blame for public services finding themselves on their knees.
Conservative MPs have lost interest in fiscal rectitude. Balancing the books is anathema to the ‘Liz Woz Right’ crowd. In their anal insistence that all policies should be “fully funded”, Starmer and Rachel Reeves are doing a better job than many Tories in showing at least some crocodile tears for the public finances.
Then again, even Labour now suggest that taxes are too high. As much as I may want to delay cuts until spending has been reduced, growth increased, or public services made more efficient, it is clear that the backbenchers want to blow any fiscal headroom that Hunt can conjure up on further reductions.
Hence why Dominic Cummings’s plan to reverse tax rises introduced under Boris Johnson and raise the 40p Income Tax threshold from £50, 721 to £100,000 won a few approving noises from MPs of a Trussite persuasion. Both they and Cummings are doing their best impression of the Bourbons in forgetting what similar back-of-a-fag-packet economics did with the Mini-Budget. The era of low interest rates is over, and the markets will not wear a borrowing bonanza. That’s even before any Middle Eastern inflation shock.
If Sunak and Hunt want to do more than just tinker with income tax, I have previously suggested cutting stamp duty to ease labour mobility and boost the housing market. Sunak’s pandemic stamp duty holiday boosted sales by 53 per cent, and increased revenue. With various tweaks, abolishing stamp duty on purchases under £500,000 and halving it on transactions above could be made effectively revenue-neutral.
If so, combining it with an Income Tax cut could form an obvious sequel to Hunt’s Autumn pairing of a reduction in National Insurance with permanent full expensing. If we must have tax cuts, why not have a package that suggests the Government’s sights are set a little higher than appeasing its core vote?