torsdag 11 oktober 2007

Taxing the Family Silver

Much nonsense has been written during the current debate on Inheritance Tax.

Those who are opposed to the tax say that people have already paid huge amounts of tax out of their hard earned wages and are entitled to pass on the fruits of their labour to whoever they want. Together with the family house. And in any case, the money is likely to be wasted or spent on wars.

The main argument of those in favour argue that inheritance enshrines privilege and inequality.

These two opposing positions appear irreconcilable but this is not so. Most of the value that is being hit by IHT is actually land value, and speculative land value at that. It is not the family house that is at issue, it is the land the family house is standing on. As anyone who owns one will know, an old house is a wasting asset; the walls crack and let the damp in, the roof leaks, the timber goes rotten, the heating system wears out or becomes obsolete and the decoration must be regularly renewed. So the reality of inheriting a house is the gift of a liability. In the meantime, the land underneath usually goes up in value quite steadily, a process boosted by by the actions of government.

So the opposing positions can be reconciled by separating out that proportion of property value that is actually land value. But there is a third voice which has been little heard in the debate, which says that the concern should not be about taxation of the dead but taxation of the living.

Taking the three together, a satisfactory policy is achievable: that taxation should fall not on people but on the land they occupy. That way, people could get to keep all their wages and pass what they have earned to whoever they like. Land, being a tax liability, would not be worth buying, selling or inheriting.

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