Four reasons Conservatives should get behind wealth taxes
This morning, David Willetts, former Conservative minister, gave a speech at the Resolution Foundation, the think tank he chairs, arguing for wealth taxes. He’s one of the first Tories to put his head above the parapet.
In the panel discussion following the speech, I was asked to make the Conservative case for taxing wealth, and in particular inheritance tax (IHT). Here are four reasons Tories should get behind wealth taxes (and for more on the subject, check out our series on wealth taxes).
- Revenues have to be raised to pay for public services – from health to policing to education. If we don’t want to borrow irresponsibly to pay for them, or increase taxes on work or consumption, then, as Lord Willets asked, what’s the alternative? Wealth taxes are the least unpalatable option. IHT specifically raises just £5 billion a year. It is so low because only 4% of estates pay it. Even taking the half of estates that register with HMRC (so excluding spousal transfers and those with a value of less than £5,000), just 8% pay IHT. The threshold is so high, and the exemptions and reliefs so wide, that over 90% of people pay nothing.
- Taxes should be as non-distorting as possible. Critics of capital taxes argue that they distort behaviour, disincentivising investment, but all taxes affect behaviour. The key is to find the fairest, least distorting approach. Our current model of taxation incentivises unproductive investment in property, which also drives up property prices, and thereby undermines the Conservative vision of a property-owning nation. Inheritance tax (along with a land value tax) is far less economically distorting than taxes on work or productive investment. Again, the least worst option.
- The taxman should be neutral in his approach to income. The Conservative belief in capitalism is rooted in the notion that hard work, ingenuity and the exercise of personal responsibility should be rewarded. Yet we have a tax system that treats unearned income more generously than earned income. Why should someone who works to earn £40,000, for example, pay around a quarter of those earnings in tax, while someone who inherits £40,000 pays nothing? Inheritance is, after all, just unearned income for the recipient.
- Extreme wealth inequality damages people’s faith in capitalism (and encourages state dependency). Wealth inequality is twice as bad as income inequality, because wealth is growing at a much faster rate than income – undermining the idea that capitalism delivers prosperity to all. People that are priced out of assets are more likely to fall back on the state. And, when it comes to inheritance, large transfers of wealth undermine the notion of equality of opportunity.