Gordon Brown’s electoral dithering of the past fortnight has transformed the
economic, as well as the political, outlook for Britain. I will leave to
political analysts the charges of manipulation, indecisiveness and poor
judgment that suddenly seem to have confirmed the warnings of the Prime
Minister’s personal critics; but there are two economic consequences of this
fiasco that remain unexplored.
The first is that the Treasury’s Comprehensive Spending Review and Pre-Budget
Report, rushed out tomorrow because Mr Brown insisted on keeping all his
electoral options open until absolutely the last moment, will now be treated
as a pre-election manifesto and not as a reliable account of the long-term
prospects for economic policy and public spending. To put it bluntly, nobody
is going to believe the figures in Alistair Darling’s statement tomorrow,
since it was planned as the launching-pad for an election campaign. But more
of that when we hear the statement itself this week.
Today I want to concentrate on a second and more important economic
consequence of Mr Brown’s election fiasco: it has forced the Tories to unite
around some radical tax changes, as a result of which Conservative economic
policy now has to be taken seriously for the first time since 1997. This is
not only because the Tories now have a genuine chance of forming the next
government – in Mr Brown’s own estimation – and therefore have to be treated
as a plausible alternative government, just as the Labour Party was in the
late 1990s. The polling figures will surely wax or wane in the years ahead,
but the underlying cause of the sudden Tory resurgence will not disappear.
What swayed marginal voters towards the Tories was not David Cameron’s
supposed charisma, but something much more concrete: a cast-iron promise of
very large tax cuts to a small but clearly targeted and identifiable group.
The discovery – or more precisely the rediscovery – that tax policies can have
an overwhelming effect on voting intentions is going to transform the terms
of political debate in Britain between now and the next election, whether
this is in 2008, 2009 or 2010. The fact that millions of voters will
instantly change their party allegiance if offered large, carefully targeted
and unconditional tax cuts has come as a shock to politicians of all
parties. Yet it was strongly confirmed by the Labour Party’s internal
polling, which showed the continuous “tracking polls” moving much more
sharply towards the Tories in the hours after George Osborne’s inheritance
tax and stamp duty announcements than they did after Mr Cameron’s supposedly
climactic conference speech. Moreover, this detailed polling revealed that
the people who changed their minds were exactly the ones expected. Young
voters trying to climb on to the housing ladder were attracted by the cuts
in stamp duty. Even more importantly, middle-aged, middle-class women, eager
to maximise the legacies that they can leave to their children and
grandchildren, will vote for any party promising to relieve them of
inheritance tax.
These findings – and the political devastation they inflicted on Mr Brown this
weekend – are hugely significant because they will convince the Tories to
keep taxes at the centre of Britain’s political agenda.
This in itself will galvanise the Tories, appease their activists and give
some substance to the small-government rhetoric that Mr Cameron has offered
as his party’s unifying ideology. The precise nature of the Tory tax
breakthrough will also put Labour in a difficult bind.
Inheritance tax is, from an egalitarian standpoint, the fairest and most
progressive of all taxes. For a Labour government to cut inheritance tax,
while raising income tax or fuel taxes or imposing economies on social
services, is ideologically unthinkable. Even if money were available for
overall tax cuts (which it won’t be in the foreseeable future), it is hard
to see Labour activists accepting that inheritance tax should be reduced, in
preference to other less progressive taxes.
Yet such an “immoral” and “regressive” tax policy seems to be exactly what
voters – including many marginal Labour and Liberal voters –
enthusiastically support. And all over the world – in America, Ireland,
Japan and more recently even in France and Sweden – we have seen regressive
consumption taxes rising, while “progressive” taxes on wealth and
inheritance disappear, providing disproportionate benefits to the wealthiest
voters. British politicians of all parties seem to be genuinely mystified by
the apparent paradox that democratic majorities vote for tax changes that
favour wealthy minorities, yet the explanation is quite simple.
As the American conservative movement discovered 27 years ago with the
election of Ronald Reagan, there is a large slice of the population who will
always vote for tax cuts, regardless of whether they are financed by higher
borrowing or by cuts in public spending, but subject to two very important
provisos. The proposed tax cuts have got to be large enough to make a
noticeable difference to the voter’s standard of living and they must be
unconditional. There is no point in spreading tiny cuts among millions of
voters – as John Smith did in his notorious 1992 Shadow Budget – since an
extra pound or two a week is not going to motivate anyone to go to the
polls. It is equally futile to offer tax cuts “as and when economic
circumstances permit”, because voters will never believe that the right
conditions are around the corner. They will, therefore, dismiss such
conditional promises as pie in the sky.
This point brings me to the fundamental reason why tax-cutting policies now
seem to be back into vogue. After many years of disappointment about public
service standards, voters are deeply sceptical about promises from all
politicians, regardless of party, to improve education, clean up hospitals
or make the streets safe. This does not mean that voters are indifferent to
policies on crime, health and education. They care about public services a
lot and would reject any party that looked like doing major damage in these
areas. They may not, however, attach much weight to any promised
improvements until these are clearly demonstrated in their own lives. Tax
cuts, on the other hand, are palpable as soon as they are announced. If the
sums involved are substantial – and a potential inheritance tax change worth
up to £240,000 certainly qualifies - a large, unconditional tax cut will,
rightly or wrongly, outshine all other differences between the parties in
the eyes of many voters. That discovery was last week’s true horror for
Gordon Brown.
Indeed, and long may tax cuts continue to be 'the vogue'. This government and the one before it has been taking too much of our money and making too little proper use of it. As a result I, and millions of other voters like me, am out of pocket and out of patience.
We want our money back now, please.
Mark Thomas, Biddulph, Staffordshire
Surely, every rational person who owns property has arranged their affairs in such a way as to minimise the effects of inheritance tax.
Taxes on capital accumulated from taxed income are unfair to some extent, but so is inheriting a very large sum of money by accident of birth. The principle that part of such a sum should be shared out by society in general seems sound enough to me, notwithstanding the practical difficulties of realising assets such as large estates - which is seldom necessary in view of careful tax planning.
A Surtees, Washington, UK
In the unlikely event that Cameron or Brown read this column, let me explain this concept.
I worked damn hard all my life paying income and capital gains tax every step of the way. Frequently my life was on the line as I stood to lose everything including my home had anything gone wrong. My tax money has in the main been squandered by whichever political party held the purse strings as they don't understand or have the talent to run large operations. At the same time they constantly increased the red tape on my businesses making it harder and riskier for me. Any money I saved after tax attracted further tax by way of VAT on everything I purchased.
Still I struggled on 18 even 20 hours a day 6 or 7 days a week. At one time I had gone 19 years without a proper holiday i.e. a 7 day break or longer.
Why did I do it?
Well partly ego to prove I could but mainly to give my kids an easier future. After all this 40% IHT is sheer grave robbing. My tax paid savings should be mine 100% unlimited.
DiJit, Glasgow,
Do as well as you can, make as much money as possible , save it all for your old age so that you are not a burden on the state and then we will take a healthy chunk of it when you die to give to our deserving voters who can not, or will not, provide for themselves - a virtuous circle to keep us in power?
Jim Golightly , Prudhoe, England
So most people would rather inherit their parents estate than have it stolen from them. Well you don't say.
If we're gong to have an open season on stating the bleeding obvious and garnering grateful votes because of, then how about these?
Lower personal taxes
Police on the streets
Sentences that keep violent criminals locked up
No more welfare sponging
Limited immigration
Standards and discipline in schools
No British soldiers in pointless Arab wars.
Jeez, maybe there's votes in this stuff?
Redcliffe, London,
Your last paragraph, Mr. Kaletsky, contains the root of last week's drama? Firstly, after gold standards from one set, and zillions of pounds from another, many people are dubious that any politicians have the experience to effectively lead public services. Secondly, notwithstanding the means at the Prime Minister's disposal, he appears not to admit how politicians' capability is assessed as limited.
Is it not clear after some sixty years' continuous growth, that our public sector needs an overhaul to give people value for their involuntary investment? As it's obvious to many that politicians can't do this, we are ready to cut the cash when offers gel.
In a mature political system we'd be electing leaders able to facilitate effective policies which a now mainly educated and articulate population contributed to defining. Leaving implementation to our appropriately experienced representatives.
Until that ever happens, we'll look for large tax cuts - and think "vision" = "cocoon".
curtis davis , Plymouth, UK
Sir,
The problems at the moment on the financial market are more serious than have been estimated. We have at the moment and the foreseeable future no room for tax cuts. Regarding Mr. Brown’s economics anybody can delegate but not many people can lead.
Regards Dr. Terence Hale Zandvoort
Terence Hale, Zandvoort, Holland
We are at one of those seminal mood shifts in the political life of a nation. We are into the third term of a Government which has tested tax and spend to destruction and it is clear that billions have been wasted on inefficient public services. Quite simply, people have had enough and tax cuts are no longer toxic – they are back in vogue. This is very bad news for Gordon Brown and Labour, since they have no room to manoeuvre on taxes. We are into the dog days of an increasingly unpopular Labour Government and unless something dramatic happens, Cameron’s Conservatives will form the next Government (whenever the election is called).
Richard, Worcester, England
What is this point about being "double taxation". Most goods you buy have some form of consumptive tax, the same regressive taxes that people seem to want in other fields of life which are paid with taxed income.
Indeed, whenever a person pays for a service, like a plumber, the money is taxed. Whenever money is transferred from person to person it is taxed again. There is no such thing as double taxation, it just shows the bizarre belief that children have a right to money that they have not earnt. Indeed, the child has never been taxed on the money, as they did not earn it. If I got paid to be a child, I at least would have done some work, but would be taxed on the income.
Unearnt wealth appears far more immoral than any tax I have ever known. Hard work should be rewarded, not the luck of the draw.
William, London,
“Inheritance tax is, from an egalitarian standpoint, the fairest and most progressive of all taxes.â€
Rubbish – the very rich avoid it altogether. How is that fair and progressive? Inheritance tax is essentially a tax on honesty. It is also absurdly complicated and supports an entire industry of avoidance and enforcement, all of which is resource that should be employed elsewhere in a productive fashion.
David Boycott, London,
Inheritance tax is a delicate area impacting heavily upon the relationships between the generations and requires very careful thought.
Further analysis of this current proposal will, i am sure, show that it is yet another boon for the post war baby boomers. Not content with all they have gained from the housing price bubble - which has saddled their children with very significant debts - they now have the prospect of a tax free inheritance which will be financed out of their children's income tax obligations (i think we can reasonbly discount any significant income from the non-domiciled - they will just non-domicile themselves somewhere else if there is really as much at stake as is claimed).
This wouldn't matter so much if this lucky group saved this bonus, but i guess it will be gladly consumed during their early retirement.
From more than a 1000 miles away, i am sure i can hear the sound of asset rich pensioner's stair carpets being loosened all over the home counties.
james, belgrade, serbia
Why not just ditch inheritance tax and stamp duty completely. These are basically asset taxes on houses. However, unless public sector spending or pensions are cut, this loss of revenue would need to be made good from somewhere. The obvious answer is to increase Council Tax; the millon pound house should be taxed at 10 times that of the hundred thousand pound flat. This would regularly tax those wealthy enough to own large properties, yet cut the huge tax bills facing home buyers and sellers. Adding this liquidity to the housing market would improve mobility within the UK enabling workers to move to where the jobs are. This would boost the economy and tax revenues yet further.
Anthony, London, UK
A good piece, save for the reason why tax cutting policies are back in vogue. The disappointment is not with the public service standards per se but with the standard after politicians have wasted so much money on them. The delivery of health, education and policing should all be far more efficient when performed by government, than when done by the citizen, but ,yet, when not done so (look at the billions wasted on NHS and education reforms, all for nowt) people will want to keep their money and give it a go themselves (private healthhcare, private schools, houses in gated communities etc). Whilst it remains bizarre that people will respond favourably to the abolition of the fairest of all UK taxes and, consequently only end up with more of the unfairest taxes as a result, i.e., taxes on wages, this is a by product of politicians' failings and the lack of confidence the citizens have in politicians, of whatever stripe.
ab, London,
Technically an inheritance tax might be progressive but emotionally it seems unfair. If you've worked all your life to pay off a mortgage from taxed income, having to take a 40% hit before you can give the benefit of your hard work to your children is unfair. The tax was initially intended to soak the rich, it was targeted at the owners of large estates and the idle rich, but now it falls mostly on people who've worked hard all their lives.
These days most people in the South-East with even quite modest houses will be hit by the tax and a tax that hits everyone hard and seems unfair is not the same tax as a feel good "let's hammer the rich" tax which is how IHT started.
John Small, Faversham, UK
Spot on Mr Kaletsky
Denver Watt, Osaka,
Ed old chap, steady on, no need to get personal. Is it greedy to not want to give 70,000 in cash to the government? Yes it isn't my money, but it is my Dad's and how much tax has he already paid in his lifetime. He's 72 still working full time (his own business) and still paying tax (lots of it). Everybody wants to leave what they can to their kids, that is basic human emotion, at least where i come from. (though I should add I hope this doesn't happen for at least 30 years as we have longevity genes!). And finally your point about the crash to come, if that happens the threshold isn't important anymore anyway. But perhaps everybody doesn't have your crystal ball. Nope most 'greedy' people like me will be doing the sums and think 'ah how much!'
James, London, UK
Mr Kaletsky, as usual you have hit the nail squarely on the head, driving it into Brown`s vitals.
Denver Watt, Osaka,
James, London, UK.
It is a shame that you suffer from what so many people in this country seem to be afflicted with and that is unconditional greed. For you to get your hands on 70,000, your parents have to die and you sell the house or remortgage it. This, either way, highlights a nation obsessed with money for nothing in the form of housing inflation or debt. By the time any of these laws are implemented we will either have had a massive price crash where far fewer people reach the threshhold or inflation will have eroded the value of your 70,000 to the point at which you won't get much change from paying conveyancing fees. When will people realise unlocking equity from property requires either downsizing or taking on debt speculating on ever rising prices. The UK is going to find out the hard way that houses are not ATM machines splurting out free money for unnecessary purchases.
Ed, London,
For reasons mostly beyond my control I have now found myself divorced and pension split. I am now like a Victorian relative absolutley dependant on an inheritance to avoid a pecunious old age . Previously I had not given much though t to IHT except it seemed rather steep at 40%. Surely some form of capital gains or banding would have been more equitable. Anything left from my parents (and who can say given old age care costs, if much will be left from even £1m estates) would be a bonus and probably go straight to my childen as I would not have much use for it. . Since divorce though all has changed , I now need every penny from my parents just to keep my head above water in old age, or even earlier. Therefore the chance to have some more is not one to be passed by. Multiply this by the thousands who divorce each year it is hardly surprising it is a vote winner.
Mr Angry , London ,
Why is it that politicians have taken so long to understand the simple message that the (wo)man in the street is fed up with over-regulation and over-taxation with next to no benefit. It's very simple really.
keith, Doncaster, UK
I learnt a long time ago that when developing an IT system I should adhere to the KISS principle, i.e. "Keep It Simple, Stupid". Clearly something that Gordon Brown has never understood (along with many public service IT managers)...
Rick, Surrey, UK
Charles is so wrong. The largest asset which most people own is their home, which they buy free of VAT, they pay no capital gains tax when they sell and get the benefit, for the present generation at least, of mortgage interest relief for a time. The windfall value of houses arises as a direct consequence of sound economic and political management (imagine what a war on UK soil would do to property prcies), a reflection of good government. And yet the electorate begrudges paying IHT, a progressive and largely benign tax. This is just greed.
David, bexley, kent
Why did Brown not keep inheritance tax in line with the increase in property prices? It is obviously out of kilter, catching more and more middle class people into the inheritance tax bracket who would not have been eligible 15 years ago. Maybe Brown is really more socialist then new Labour at heart.
Tories should now find ways to raise the threshold of taxable income, even if it comes at the expense of adding a new tax level for those earning at the top end of the scale. Help poor people pay less tax rather than give them tax credits.
paddy, dumfries, Scotland
Inheritance tax is just pure robbery - and for it to fall not just on the "rich" but the middle class - everyone can see it for what it is. The tories are on to something here because it isolates the labour party and Gordon Brown.
Gordon Brown has huge weaknesses; the tories should exploit his earnestness, the belief he has that government can run things better, that government can "care".
David Mathieson, Mequon, USA
No wonder my own poor working class family
have always seemed to have much closer bonds
than the families of my wealthier friends.
Sitting around with your bloody calculators
waiting for the big day, I would disinherit the
bloody lot of you.
mark crombie, Epping, UK
"...middle-aged, middle-class women, eager to maximise the legacies that they can leave to their children and grandchildren, will vote for any party promising to relieve them of inheritance tax."
These women will vote now on the basis of something that might not happen for 20 or 30 years? Crime, inflation, NHS, immigration...none of these things will be more important to them than being able to save their children a bit of tax after they die?! Assuming, of course, that all the assets haven't been eaten up in care costs in the meantime.
mike power, aberdeen, uk
Double taxation! We are taxed on our income and then on what we save out of our income. We are taxed again if we spend our taxed income. I pay income tax then save some money. The interest is then taxed. If I then take out some of the interest and buy something I will pay VAT. Surely triple taxation?
If we save within the small ISA allowance schemes then we are taxed on those when we die!
Politicians believe that all money is theirs to spend and they begrudge us our personal wealth.
Even if we are poor we are abused and controlled by the tax system.
charles, nottingham, uk
Inheritance tax is not fair or progressive. Wealthy people avoid the tax while those who pay the highest proportion are thrifty people who bought their own home. And stamp duty is a tax on mobility more than a tax on wealth.
Gordon Brown's strategy to increase property taxes by failing to increase allowances in line with inflation was bound to come back to bite him eventually. The sheer size of the sum when inheritance tax or stamp duty is paid is shocking to most ordinary people.
A Clarke, London,
What people object to is double taxation, not progressive taxation. Interitance tax and property stamp duties are paid from income that has already been subject to income tax. Taxes that are seen as unfair are good electorate targets. Taxes in Britain are too high, and this has come about because of excessive public spending, and this has not delivered the promised outcomes.
Liam, Pristina, Kosovo
Right I worked out that the Tory tax cut if applied to my parents house in North London (I'm one of four) is personally worth 70,000! Now imagine millions of people across England doing the same sum on their now wealthy parents houses (any house in North London must be worth well over the current threshold). Huge swathese of middle class people stand to save a personal fortune by this policy. No wonder it is popular! Of course we could just give it to the government to spend on worthy causes like Iraq, the millennium dome etc etc
James, London, UK