Inheritance Tax thoughts

I have spent a chunk of this morning discussing Inheritance Tax with a few people on Twitter. There is clearly a very strong feeling amongst certain people about this tax. Phrases like "Death Duties" and "Taxing the dead" were used at various points. There was also one person who had been forced to sell their home in order to pay IHT.

The view I have taken on IHT is that it is actually taxing the heirs rather than the dead. I have also perceived it as a means of increasing social mobility.

However I fully accept that there are problems with it. I don't think anyone should be forced to sell their home to pay it, that is just wrong. I also know that very rich people get around it in various ways. So I find myself in a position where I agree with the principle (although the exact threshold and percentage I am less definite about) but am concerned about how it works in practise.

from what I can tell, there seems to be a fairly clear position from both Tory grassroots (against in principle) and Labour grassroots (in favour in principle). I am curious to know what other people, especially Lib Dems think about this.

Ken Clarke - loose cannon?

Following Ken Clarke's comments at the weekend about inheritance tax (he said that fulfilling their pledge on reducing the threshold was not one of their main economic goals) Iain Dale has said that it is a minor gaffe, he should just concede so and move on.

That is fair enough as far as it goes but it does demonstrate what I referred to a couple of months ago, that he is not exactly in lock-step with the Cameron leadership.

Dale also says that Clarke was not quite up to speed with the fact that the IHT policy was actually a commitment and not just a pledge. It's not really good enough though for a senior party grandee who has been brought back to the front-bench to add weight and gravitas to not be fully up to speed with policies that he then goes onto national TV to discuss. I have heard in the past that Ken Clarke is considered to be lazy by some of his colleagues. If the Tories are serious about vying for power, they cannot allow any of their front-benchers to have the charge of being lazy sticking to them. I certainly don't think that charge could be applied to any of the Lib Dem front-bench although we of course suffer from not getting as much coverage as the other two main parties (Vince Cable excepted at the moment!).

I originally thought bringing Clarke back was a good move on Cameron's part but now I am not so sure. I suspect it will only take one or two more gaffes like this before he is sidelined.

VAT's not the way to do it

So it looks like the government is going to announce a temporary cut in the rate of VAT from 17.5% to 15%.

My initial thoughts on this are:

1. For the cost to the economy, this is not going to make a significant difference to people's daily lives. It will cost £12.5bn per year apparently (for as long as it is left in place). However let's say you are going to go out and purchase a massive plasma TV that would previously have cost £999. Well under the new proposals it will now cost you £977.74 (a 2.13% overall reduction). Will that really make that much of a difference?
2. What are the odds that retailers will take the opportunity to not pass the full reduction onto customers? In the above example it would be very easy for the retailer to reduce the price to £979. It looks virtually the same at the reduced price but is slightly higher. I cannot imagine many people insisting to see the manager and demanding the full 2.12765957% reduction (assuming they even know what the previous price for the item was).
   
3. VAT does not apply to things like (most) food, children's clothese, books etc. so quite a lot of the things that people purchase on a daily basis will be unaffected by the change. This effectively means that the change will benefit the richer more as they are more likely to have more disposable income to spend on discretionary goods that are affected by VAT. This is starting to have echoes to me of the 10p debacle that ultimately made the poorer worse off.
   
4. I run a small business, as do lots of people in this country. At the moment our systems all use 17.5% as the basis for VAT calculation. It will not be a huge effort to change this, but it will take some and it is possible mistakes will be made. Now multiply this by all the millions of businesses that will be affected by the change and you can see there will be an administrative burden. To an extent, that's just the way it is for businesses, there is always red tape. However this is a "temporary" change, i.e. they are just fiddling and it is likely to go back up in a year or two's time. That's yet more changes later on and yet more administrative work.
5. Relating to our business, this change is not likely to make much is any difference to our revenues as a business. Virtually all the VAT we pay is offset by the VAT we charge our customers.
6. Robert Peston thinks that in order to pay for this VAT cut, the rate will eventually have to go up to 22.5%, the only question is when will this happen. However if/when that does eventually happen, that will mean a pretty large hike in the amount charged for goods which include VAT. Surely this will damage the economy. Oh, and it is also worth noting that aside from this (temporary) measure, VAT has never come down in the long term s it is a pretty safe bet that once it reaches 22.5% it will stay at that rate (or higher) for the long term.
   

Overall, I cannot see this change having that much of an impact. Given that the £120 basic tax rate hike from earlier in the year (a cobbled together fudge to mitigate the effect of the abolition of the 10p tax rate) that gave each taxpayer an extra £10 a month cost £2.7bn, a quick back of the envelope calculation tells me that instead of reducing VAT, they could have given an extra £46.30 per month to each taxpayer in the country. This would have benefitted everyone who pays tax equally and actually lifted some people out of paying tax altogether. There are doubtless even more equitable ways to do this to focus on the poorest most.

I think if this change goes through in the form I have seen reported so far then it will be a very expensive and possibly counter productive damp squib.