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notes_on_real_life

Inheritance tax abolition

Here's an interesting way of thinking about a tax: ask the people who pay it, how much they would pay to have it abolished.

For example, suppose I told you that you can expect to pay 拢6,000 of income tax next year other things being equal. How much would you be willing to give up not to have income tax?

It's clearly worth at least 拢5,999. But would you pay more than 拢6,000 to buy your way out of a 拢6,000 tax bill?

The answer is you might. If there was no income tax next year, you wouldn't need to administer your tax, you wouldn't need to fill out a tax return, and you could then do unlimited overtime tax free.

In fact, you might decide you would happily do a lot of overtime next year if there was no income tax to pay on it, so yes, you would be willing to pay something for that privilege.

It is a hypothetical thought experiment rather than a practical idea, but if people would happily pay the government 拢1.20 to avoid a tax that raises only 拢1, there is a wastage in the tax system. It is not collecting as much in money as it is hurting the taxpayer. This provides an interesting measure of a tax's effectiveness.

I mention this concept, because arguably it would be interesting to know how inheritance tax (IHT) would fare if we sold people the right to be exempt from it. I certainly know people who would happily pay a lot more not to have the tax there at all, than they will actually hand over to the government. The reason is that they avoid the tax, but it costs them a lot of accountancy bills and stress to do so.

Remember the basic rule of tax administration: the public can quite rationally spend 99p to save a pound of tax. But if they do, they still lose 99p and the state gets not a penny. So taxes which allow or encourage us to engage in costly legal avoidance are expensive ways of raising money.

Which leads to the question of the day, should the Conservatives abolish inheritance tax?

It is an oft-avoided tax, with expensive consequences. It can have different effects on families depending on how much trust they put in each other. (Parents might be willing to give away assets to children well before they die to avoid the tax, if they can trust the children to look after them should hard times come. Less trusting parents may choose to hang on to their cash until they know they don't need it).

IHT can also lead to some odd discrepancies in the lifetime tax bill paid by similar people who just happen to die at different times. (Someone who dies earlier than anticipated, and who has not given away, or spent their assets can end up paying more tax on the same lifetime income than a similar person who dies to plan.)

However, one can't avoid mention of the reasons why the tax has persisted in different forms under governments of different colours for hundreds of years. In some ways, death is a good time to catch people for tax purposes, and it is also one when they usually have free assets available to pay it.

And don't forget its goal - apart from raising money - is to enhance social mobility by limiting the degree to which inherited advantage can help the offspring of the wealthy. It probably succeeds in that to a small degree.

Perhaps most of the debate about IHT comes down to one salient point: that only about 6% of estates pay it (although that is probably rising fast). The vast bulk of us do not.

Yet, while that is most frequently mentioned as a defence of IHT, it is arguably a measure of its inefficiency. It appears unpopular with far more than the 6% who are actually handing money over, which implies it hits an unspecified larger number of people who go to some effort to avoid it, or who wrongly worry about paying it.

Those are costs to the tax that generate no revenue whatsoever.

Of course, these arguments are all relative. In actually deciding on a policy towards the tax, the government and opposition have to weigh up its unpopularity and costs against the alternative taxes that would raise the same money.

John Redwood's Economic Competitiveness Commission has made the for the Conservative party to abolish it, echoing previous calls both before and since the last election for this to be seen as one of the main pinch points needing attention in the tax system. Just a quick three points to make about this.

• The first thing to note that it is not currently Conservative policy to abolish the tax, and even though George Osborne has not shut the discussion about inheritance tax down, he has not changed his stance on it at all. He is not committing himself to it now.

• The second thing is that Mr Osborne will be able to afford some tax cuts by the next election, because he can announce some green tax rises that will pay for them. We just have to be patient to see what they are.

• Thirdly, the prominent inclusion of inheritance tax abolition in the presentation of the economic competitiveness report - when it actually has rather less to do with economic competitiveness than other suggested tax changes - more or less seals it as now holding the number one slot on the Tories tax cut priority list.

So, whatever the merits of abolition, these three points led me to the view it would probably occur under a Conservative government, at an exchequer cost of about 拢4 billion a year, perhaps a little less if some of the lost tax is recouped through the capital gains tax system as the Conservatives propose.

notes_on_real_life

Curbing regulation

Regulation is rarely popular, in principle. Getting the government off the backs of business, stopping the absurd health and safety police, cutting red tape - we all agree with those.

It's just that in practice, confronted with any particular problem, the words "something should be done" are usually irresistible. And that something is usually regulation - at least, it's that unless there's a convenient minister who can come home early from their holiday to show how seriously the problem is being taken.

So there's inordinate pressure for more regulation, and reducing it turns out to be quite difficult.

For example, we have market shenanigans at the moment so it was no surprise to hear a call for more regulation of hedge funds last night.

And even the most robust politicians struggle with this. In 1985, Margaret Thatcher published a white paper on deregulation, called "Lifting the Burden". But the burden was unlifted a decade later, when John Major set up the deregulation unit. Tackling red tape was like trying to wrestle with a greasy pig, he said.

And it still is. More regulation continues to flow.

Our debate on it often goes round in circles, and perhaps it does so because we often confuse two different things.

There's regulation to make people behave as we want them too - stopping shops from opening on Easter Sunday for example. And there's unnecessary bureaucracy - money laundering laws that don't work and are cumbersome to comply with.

These are not the same kinds of problems.

Stopping the shops opening at Easter may be controversial. There are people who'd like to open. But there's no red tape to the law at all. Society has made its decision and shops adhere to it.

Money laundering is quite the opposite - the laws against it are not controversial in principle, but they do involve a lot of red tape in practice.

We don't always draw the distinction between the argument over the goal, and the argument over the way it鈥檚 done.

Now John Redwood's makes a serious attempt to reverse the tide of both red tape and regulation.

But if it鈥檚 to be successful, it'll probably be down to John Redwood. In fact, you'd probably need him to implement it.

It's not that he necessarily has more insight into administration than other politicians - it's really just that he's more willing to abandon the idea that every problem requires a solution.

It's John Redwood for example, who'll argue against mortgage regulation in the very week that US mortgage problems have brought turmoil to the world's financial markets.

John Redwood is far more likely to defy a public clamour than the other 645 MPs.

The reason why regulation persists though, is that politicians with the courage to defy the clamour are often the ones who are not put in charge.

notes_on_real_life

Looking after the super-rich

There are lots of ways a country can help earn a living - it can build cars like the Germans, make movies like the Americans or sell oil like the Saudis.

And what does Britain do?

Well, we might have once been the workshop of the world; but now we're butler to the global super-rich.

And we don't just provide butlers for them; we have company headquarters here running their businesses, shops serving their every whim, and lawyers settling their divorces. It's not enough to employ us all, but every little helps!

Why did we develop such pre-eminence in this sector? The industries that countries flourish in reflect the resources they have and the markets they're suited for:

- The Saudis export oil because they have oil.

- Thailand does tourism and its "related services", because it has sun and tourists.

And Britain sells services to the super-rich, partly because we are traditionally strong at services, but mainly now because we have the super-rich.

They come to the UK for many reasons. The English language for example. But it's not just that - they can speak English if they want to wherever they go.

No, perhaps the main reason they come to us is because we don't charge them nearly as much as other countries.

In most parts of the world, if you reside in a country, you pay tax in that country. And you pay it on your whole income, wherever you make your money.

In the UK, we only charge you UK tax on your UK income, but not the income you make elsewhere in the world, unless you bring it into the UK. It can make quite a difference.

And all you have to do is prove that although you are resident here, you are not "domiciled" here. You live in Britain, but your roots are in Russia for example.

This enormous tax concession plausibly costs us nothing - because if we didn't offer it, none of them would come and we wouldn't get anything from them anyway.

But equally plausibly, we might get some of them anyway even if we did charge them more tax: after all, most of our competing tax havens are less interesting places to settle.

So it really comes down to whether we like our role as butler to the world's elite.

It is certainly cleaner and more glamorous than some other jobs.

But it has its potential drawbacks.

- Do the global super-rich make our home-grown rich feel relatively poor, to the point they start thinking of five million pounds a year as an inadequate salary?

- Is it secure as an economic base for the country - or will they up-sticks and move to Dubai if that offers a better deal?

All one can say is that you want to build your economy around servicing the business activities of the super-rich, you'd better have some super-rich around.

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