The Conservatives’ proposals for tax reforms have raised the political temperature in the battle for votes from ‘anxious’ middle England. Proposals for transferable personal allowances, cuts to inheritance tax and stamp duty will be largely regressive in their impact and set down a challenge for Labour to respond without contradicting its core values.
The raising of the inheritance tax threshold will serve only to concentrate ownership amongst the wealthy, exacerbating an already yawning divide between the haves and the have-nots. Currently, in the UK, the richest one per cent of the population owns 21 per cent of the total wealth in the country, whereas the bottom 50 per cent own just seven per cent. Inheritance tax serves to moderate the transfer of those inequalities between generations and provides government with revenue which can be deployed to support policies like the Child Trust Fund that will provide an essential springboard at the beginning of adult life for every young person.
The case for cutting inheritance tax has largely been made on the basis of its unpopularity, but part of its unpopularity must surely rest with the failure of the government to set out the rationale for the tax. Focus groups conducted by ippr found that while most people’s initial attitude towards the tax is hostile, after a short amount of time discussing the tax and the potential ways of spending the funds from it, opinion amongst some participants was more supportive. Those that argue for abolition of inheritance tax should pause to consider how the revenue it provides would be replaced. Increases in income taxes or VAT is likely to be even more unpopular.
Following their focus on social breakdown, the Conservatives also proposed a transferable tax allowance for married couples so that the non-working partner receives the other partner’s tax allowance in situations where only one partner is working. They argue that marriage should be encouraged through the tax system because evidence shows children who are brought up in married two-parent families do better.
However, at a time when all parties are committed to addressing child poverty, regardless of family situation, diverting a large amount of resources to married couples with only one person working will do little to reduce poverty. This approach would create an incentive for one member of a couple to not work, which given that work is the best route out of poverty, undermines other reforms aimed at encouraging work. Also, there is no evidence that it would encourage more people to marry. The last time a government introduced marriage incentives in the form of married couples’ allowance in the 1970s, it was famously accompanied by one of the greatest moves away from marriage that century.
The Conservatives have further proposed exempting first-time buyers from paying stamp duty on houses up to £250,000. Stamp duty has come under fire as a contributing factor to the high cost of buying property, and it is certainly the case that more stamp duty is being paid by more people. Gordon Brown introduced higher rates of stamp duty for more valuable homes, but the other reason people are paying more is because of unearned windfall gains from the rapid rises in house prices.
The average amount of stamp duty paid by first-time buyers is about £2,000. When the ratio of house prices to earnings is more than eight to one for many first-time buyers, reducing the cost of house purchases by £2,000 will only have a marginal effect on affordability. It will not increase access to home ownership for many and will help only those relatively well-off people who are just priced out of the market. This policy would make little difference, therefore for those facing a bigger affordability gap between their purchasing power and the bottom rung of the ladder.
While Labour needs to respond to the Conservatives proposals, it should not just mimic them. There are more progressive alternatives. For example, ippr has previously called for progressive banding for inheritance tax with a lower starting rate and a higher rate for larger estates which would be fairer than the current system. It could also generate additional revenues for policies that support asset accumulation at the other end of the income scale, such as the Savings Gateway.
Looking at taxation policy for couples, introducing a Personal Tax Credit Allowance would give all individuals in eligible families their own personal allowance – allowing them each to earn up to £100 a week before their Working Tax Credit entitlement started to be withdrawn. This would increase the financial reward to work for families where a second adult moved into work, and help reduce child poverty.