For the sake of our children, stand firm on tax by stealth

In the dark days of the 1970s, Labour MPs Jeff Rooker, then aged just 36, and Audrey Wise engineered an important rebellion against Denis Healey’s 1977 Finance Act. They ensured that legislation was passed so that the personal tax allowance would be linked to inflation.

The amendment reduced taxation by stealth. Before indexation, people’s tax burden would increase as a result of increases in earnings not being matched by increases in tax allowances.

However, we desperately need a modern version of the Rooker-Wise amendment as ever-more stealthy politicians find ever-more ingenious ways to tax us.

Let’s start with wealth taxes. By the next election, the level of assets that somebody can pass on to their children before paying Inheritance Tax will have been stuck at £325,000 for six years: meanwhile, it is a fair bet that the Retail Prices Index will have been increased by about 25 per cent over that period.

There are now very few London postal districts (for example, Forest Gate, Plaistow and Thornton Heath) where somebody could die and leave a house of average value to their children without paying Inheritance Tax. Inheritance Tax is, of course, a tax on wealth accumulated out of income that has already been taxed. It should be reduced or eliminated and certainly not increased by stealth.

There are similar problems with Stamp Duty. Since 2003, anybody buying a house for £250,000 has paid Stamp Duty of 3 per cent. This is a lot of money and a serious impediment to mobility.

However, at least back in 2003 the average house price in London was around £250,000 and there were plenty of houses available for less than that figure; today, the average house price is over £400,000 – indeed, the average flat costs well over £250,000.

It is not surprising that Stamp Duty revenues have gone from being a pimple on the public finances to a major revenue raiser. Stamp Duty is now a serious cost for ‘hard-working people’ (as the government likes to describe them).

However, perhaps most surprising, given the brave rebellion by Rooker and Wise, is what has happened to personal tax allowances.

From 1979 until 2007, the personal allowance increased in real terms but it did not keep pace with wages – under ostensibly tax-cutting governments. The situation for married couples has been much worse than that for single people as the married couple’s allowance fell rapidly in real terms before being abolished. Of course, since 2010, the Liberal Democrats have forced the coalition to implement a huge increase in the personal allowance, rectifying some of this damage.

So, Rooker and Wise succeeded in ensuring that the government could not increase taxes simply by increasing inflation, but they did not ensure that the basic rate tax threshold kept up with increases in wages, at least up until 2010.

But, even worse has been the impact of stealth taxes on the higher-earning middle classes such as senior policemen and deputy heads of schools. Higher rate tax was once the ‘privilege’ of the rich.

However, the level of income you can earn before higher rate tax became due fell by nearly one third relative to earnings between 1979 and 2010.

And, since then, things have got worse.

George Osborne has actually cut the amount of income you can earn before paying higher rate tax and he will preside over an increase in the number of people paying higher rate tax of well over one million. When Nigel Lawson was Chancellor of the Exchequer, one in twenty people paid higher rate tax; now the figure is one in six.

Furthermore, Osborne has decided to increase the tax thresholds in future in line with increases in the CPI rather than the RPI. That rather arcane change means that tax thresholds are likely, on average, to go up by less than RPI, which is a broader measure of inflation.

By a small technical change, the Chancellor has condemned future generations to an increasing tax burden.

So, where do we go from here? We need a new Jeff Rooker: a backbencher from the governing party with a backbone.

It is interesting that the government has decided to commit the resources of future generations to increasing pensions year-on-year by the highest of wage inflation, price inflation or 2.5 per cent.

Of course, spending promises are cheap when it is future governments that will have to fulfil them.

We need a backbencher who will move an amendment to the 2014 Finance Act to increase all income tax, Stamp Duty and Inheritance Tax bands by the higher of wage inflation and retail price inflation in future years unless there is a specific vote by parliament to overturn it. Any volunteers?

This article was originally published by the Daily Telegraph.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

10 thoughts on “For the sake of our children, stand firm on tax by stealth”

  1. Posted 14/02/2014 at 14:30 | Permalink

    I always think of it as the Rooker-Wise-Lawson’ amendment. Of course, inflation was exceptionally high in the 1970s, which is why index-linking was so necessary then. But even at the modest’ rate of 2% to 3% for the CPI (or somewhat higher for the RPI, as Philip says) cumulatively it mounts up. Let’s not forget, either, that Capital Gains Tax was once index-linked, but no longer is. One can understand why governments are tempted to swindle people in this way, but it is disgraceful that it seems to have become accepted as a ‘normal’ way of raising tax revenue these days.

  2. Posted 14/02/2014 at 21:50 | Permalink

    I agree. However, there is a transferable nil rate band so that the figure is £650,000, not £325 (unless unmarried or divorced parents). Still, not high given London property prices and the indexing issue still applies.

  3. Posted 14/02/2014 at 23:56 | Permalink

    yes, the transferability of the nil rate band is one of the few unambiguous improvements to the tax system i can think of since 1988

  4. Posted 15/02/2014 at 15:02 | Permalink

    Philip – I think you are being slightly unfair in claiming that “George Osborne has actually cut the amount of income you can earn before paying higher rate tax” because the downwards adjustment in the higher rate threshold was done only to negate the effect, for higher rate income tax payers, of the raising of tax allowances – those on the higher rate didn’t lose out because of this.

  5. Posted 15/02/2014 at 16:21 | Permalink

    HJ – I think only marginally unfair. The principle of our tax system is that you get taxed at zero on X, at a% on X+Y and at b on X+Y+Z. In the past the indexation of X did not lead to a reduction in Y to compensate. Obviously the reduction by Osborne was done for a reason (to facilitate redistribution towards the poor) but the normally understood purpose of raising the personal allowance is to reduce everybody’s tax by a given lump sum which still benefits the poor disproportionately. The fall in the 40% tax band is nevertheless shocking over a long period of time and Osborne has exacerbated rather than ameliorated the situation.

  6. Posted 15/02/2014 at 18:38 | Permalink

    Philip – That was the point! He didn’t have the money simply to raise personal allowances without any other adjustment. It wasn’t done simply to benefit the poor disproportionately, it was also to provide incentives to take low-paid work instead of relying on benefits – and nobody actually lost out. I find it hard to see any valid criticism of Osborne in this instance.

  7. Posted 15/02/2014 at 20:50 | Permalink

    well, it is not without casualties as he has raised the marginal tax rate for a lot of people and cannot have saved more than about £300m – possibly even less. I would be interested to know (the calculation can be done easily enough) whether the basic rate band has been adjusted for inflation after allowing for this

  8. Posted 16/02/2014 at 15:47 | Permalink

    Interesting you should touch on inheritance tax and the spin that it was a tax on the amount people wished to leave to their children.

    Looked at another way it is a very low tax that is applied to windfalls received by children who have done absolutely nothing to deserve it.

    I was personally shocked when I was left an amount just below the taxable amount and I had to pay no tax. No tax on such a large sum?

    This was a windfall that I had done nothing to deserve, absolutely nothing by way of a contribution to society and it was an outrage to those less fortunate that I should be allowed to get away tax free.

    That the IEA might support the notion that it is OK to receive wealth without contributing towards it is surprising however, there are a lot of big egos out there and I suppose they will all eventually die.

    Reducing taxation is an imperitive but lets make sure all taxes are raised in a fair manner

  9. Posted 16/02/2014 at 20:58 | Permalink

    @waramess – it is true that there are some free market guys who do believe in taxing inherited wealth quite severely on the grounds that you have suggested. As it happens, I am not one of them. The wealth is accumulated out of income that has already been taxed (in the vast majority of cases – ignoring country estates and the quirks of residential property taxation which I do think is an important but separate problem). I prefer to think of an inheritance as a choice by the donor who could make a range of other choices (such as splashing out on a few holidays) and if you tax inheritance it will just encourage more conspicuous consumption. Having said all of that, I would like to see inheritance tax (for as long as it remains) being based on gifts received rather than the size of the estate (as it is in most other countries).

  10. Posted 16/02/2014 at 21:26 | Permalink

    @waraness – No, Inheritance Tax is not a tax applied to windfalls received by children. The name “Inheritance Tax” is a misnomer because it is not a tax on the wealth someone inherits, it is a tax on the wealth of the person who has died. It matters not how much an individual inherits – they do not pay tax on that inheritance as the tax is levied on the amount of wealth left by the deceased, whether it is left to be shared between 100 people, each of whom may have inherited only a modest amount individually, or whether it is left all left to just one person. Personally, I would like to see capital gains tax paid by the inheritors and so-called “Inheritance Tax” on the estate of the deceased abolished.

    Incidentally, I would caution against deciding who or who is not “deserving” – once the state starts to decide this, we are all in trouble.

Comments are closed.