Does the Conservatives U-turn on inheritance tax suggest that society is ready to change its attitudes to wealth taxes after death? If so, we need to know how much can be raised and come up with an optimal design
Do you remember when the Conservatives dubbed Labour’s plans for funding elderly care a ‘death tax’? It’s hard to believe it was only three years ago.
It was a powerful moment for those working in ageing policy: the point when it became clear there was no chance of care funding reform before the 2010 general election. It was also the point when, after years of declaring ‘social care needs to become a political issue’, campaigners started saying ‘we need to take the politics out of social care’.
Now fast-forward three years. In this week’s Budget, the Chancellor justified the decision to freeze inheritance tax thresholds for three years until 2017 to part-fund the ‘capped cost’ social care funding reforms. The rationale? This is ‘a simple and fair way of ensuring that those with the largest estates, who are more likely to benefit from social care reform, help to fund it’.
In other words, the Chancellor wants to explicitly link inheritance tax to public spending on social care. How did it come to this? After several years in power going over the numbers, it appears the Conservative Party have realised there’s nowhere else to look for money to provide a decent offer to core OAP voters in the southeast. It also looks like ministers have realised the benefits of a ‘something for something’ offer to grey voters.
However, this little-noticed but seismic change raises two questions: is society now ready to change its attitudes to wealth taxes after death? If so, what should policymakers actually be trying to achieve in terms of tax design?
There is clearly now far greater societal awareness of constraints on public spending over coming decades, and the fiscal pressures imposed by population ageing. However, commentators still appear strangely nervous of having an honest debate.
Among members of the Really Angry Campaign Against Pensioner Benefits, the refusal to consider the policy effects of scrapping so-called ‘pensioner benefits’ is usually matched by complete silence on what HM Treasury now regards as a ‘fair and simple’ option for the older cohort to pay their way: estate taxes.
And interestingly, despite taking their turn on the stage to exhort older people to expect less from the state and be ready for ageing the House of Lords Select Committee on Public Service and Demographic Change opted to rerun vague – and ultimately useless – recommendations for greater take-up of equity release products among pensioners, rather than mention the ‘i’ word.
In part, such blinkered thinking can be put down to a lack of agreement about what sort of estate tax society should be working toward. And no one should be in doubt, there are both problems and advantages with estate taxes, as the Strategic Society Centre has previously explored. It’s particularly easy to overestimate how much could ever realistically be raised by any inheritance tax.
So, in terms of tax design, the key questions are how much could realistically be raised through inheritance tax and what is the optimal design?
It doesn’t take very long thinking about the issue to realise that families would quickly move their savings around in response to any estate tax that was too intrusive. In fact, taxes on older people’s more immovable property wealth – particularly capital gains – look a better bet than a generalised inheritance tax. This would also help with related policy decisions, such as whether inheritance tax should be hypothecated.
Why does this matter? The population is ageing, there’s tremendous pressure on public spending, and we have the wealthiest older cohort in history: something has to give.
If we could just get agreement among policy wonks and economists – okay, probably not economists – on what the best form of inheritance tax that we should be working toward is, this would finally set up a realistic public debate about what older people should contribute to public spending in way that is - don’t forget – ‘fair and simple’.
That’s not too much to ask, is it?
James Lloyd is director of the Strategic Society Centre
