All the parties are on a spending spree — but only Labour would raid inheritances

We can’t yet scrutinise the party manifestos, which will be published later this week, but it is a safe bet that they will all, to a greater or lesser extent, follow the advice of one of the

BBC’s favourite economists, Mariana Mazzucato, on Twitter: “The UK election manifesto is an easy one. A decade has been lost between useless (and mean) AUSTERITY and misinformed BREXIT.

Solution is to INVEST INVEST INVEST.”

Translated into plain English, Professor Mazzucato means: “Spend, spend, spend.” Politicians and economists of the Left always prefer to call spending “investment”. Even private investment

quite often turns out to produce no measurable return. But when politicians are spending taxpayers’ money, it is unusual to produce a return. Most of the money spent on public services goes

on the wages and salaries of those who work in them. Public spending may be necessary, but politicians shouldn’t pretend that it is “investment” and voters should be suspicious when they do.

At present Labour and the Conservatives are vying to outbid one another in spending. This is dangerous for all kinds of reasons, but one of them is that such profligacy must be paid for in

one of two ways: higher taxes or higher borrowing. The Tories dislike taxes and abhor debt on principle, but in practice they have resorted to both ever since the Thatcher governments of the

1980s.

Labour has fewer inhibitions about either method. Their last government, under Gordon Brown, ran a growing budget deficit and bequeathed an even bigger debt. The Tory-Liberal Coalition

raised taxes in the name of austerity, but only cut spending in relative terms. Living standards stagnated, but that was very different from the postwar era, when austerity required real

cuts in living standards. What necessitated George Osborne’s “austerity” was the eye-watering cost of interest on government debt — which at its peak cost the equivalent of a large spending

department such as education.

While Osborne took a leaf out of Brown’s book of “stealth taxes” — for example by failing to raise tax thresholds in line with inflation — he also understood the importance of giving

taxpayers incentives to save, invest and accumulate wealth, so that they would not be dependent on state handouts.

One of the most important fiscal reforms he undertook was in the controversial field of inheritance tax (IHT). Osborne first made his mark in 2007, while still in Opposition, by promising a

dramatic rise in IHT allowances — a move that proved so popular that it spooked Brown into reciprocating with a similar tax cut and even cancelling his planned election. During his long

period in office, Osborne continued to reform IHT, which is uniquely unpopular despite the fact that at present it is only levied on about 5 per cent of estates.

Once these reforms come fully into effect next April, couples will be able to leave their main residence free of IHT up to nearly £1 million. A rapidly growing number of ordinary

middle-class families are being caught by what were originally “death duties” aimed at the very rich. IHT receipts are forecast to rise by a third in the next five years, from 5.2 billion in

2017 to £6.9 billion in 2024, as the generation that benefited most from the house price boom that began in the 1960s passes away.

But Jeremy Corbyn’s Labour Party is not content to let nature take its course. They long for a wealth tax and see IHT as a means to impose it. So their Land for the Many report advocates

replacing IHT by a lifetime gifts tax, with a threshold of £125,000. Property inherited by children would be treated the same as gifts and anything above this low threshold would be subject

to income tax. The Left-wing think tank IPPR estimates that this tax would more than double the yield from IHT overnight, giving the Exchequer a windfall of nearly £15 billion by 2021. No

wonder John McDonnell, the Shadow Chancellor, is so eager to make this draconian gift tax official Labour policy.

The result, however, of what amounts to a raid on the middle class would be catastrophic. IHT is unpopular, partly because it is seen as double taxation, but mainly because it flies in the

face of the human instinct to pass on savings and property to one’s children. If Labour were elected, it would cumulatively destroy the ability to pass down wealth through the generations.

That, in turn, would remove the most important of all incentives to accumulate capital. It is hard to imagine a single more tyrannical or damaging measure.

Labour’s tax grab might be popular with think tanks such as the Resolution Foundation, which campaigns for “intergenerational justice”. This means telling millennials that they have been

cheated by their parents, the baby-boomers. But in practice the expropriation of the latter would hit the former hardest. The “bank of Mum and Dad” would go bust.

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