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A Briton sets up a business, risking her savings and employing people on the way. If she makes a profit, it is taxed. If she sells the company, she is taxed on the capital gain.

Another Briton buys a home. Through chronic undersupply in the market, or travesty of a market, the price goes up by half in a few years. The only tax on the property is paid to the local council, at bands set a quarter of a century ago. If the homeowner sells, and it is his only house, he incurs no tax.

Yet another Briton inherits a house worth, say, £600,000, three times the national average. She pays no tax.

One of these capital-rich individuals built their asset from nothing, one bought theirs and watched passively as it grew and the other’s principal talent was the dumb luck to be born into the right family. It takes an obtuse theory of justice to tax them in anything other than ascending order. The British state does the opposite.

George Osborne wants to refurbish the Conservatives as the natural habitation for working people: the labour party if not the Labour party. The chancellor’s mission is avowed in his every budget, including the one he will give on Wednesday, and symbolised in his every hard-hatted excursion to a construction site. But the message will always be muffled as long as the tax system favours assets, including those bequeathed, over earned income.

A country’s tax code is not just a mesh of rules and rates. It is a secular bible of moral signals. When the state taxes one thing and exempts another, raises this levy and cuts that one, it offers an account of what is and is not noble conduct. A chancellor is like a cleric, except his exhortations are backed by material incentives and not just vague threats to our immortal souls.

For the most part, Mr Osborne uses this didactic power well. In previous budgets, the chancellor has taken very low-paid workers out of income tax and cut corporation tax while squeezing the luxury end of the property market, that gaudy casino of one-way bets. His themes are thrift and toil.

But the greatest perversity of the system survives and will only worsen if the threshold for inheritance tax is lifted this week. He should reform the levy instead. It is currently a flat and brutal 40 per cent: a more graduated system, with a lower starting rate but also a lower threshold, would make more sense.

Conservatives can demand a relationship between desert and reward or they can oppose inheritance tax. They cannot do both. Bequests of capital give privileged children, however gormless and mediocre, a crushing advantage. When Tories dress up this warping of life chances with Burkean pieties about a concord between the generations, their most impressive feat is keeping a straight face.

The problem goes beyond inheritance tax. Second homes enjoy favourable treatment, which is why the great wave of housebuilding that seems permanently in the offing may only swell the portfolios of entrenched owners.

And the problem goes beyond the Tories too. The left has become obsessed with the transnational mega-rich who buy up super-prime London. But these people are minuscule in number — local curiosities in Hampstead and Mayfair. Inherent to the word “oligarchs” is the fact of their rareness.

If the left wants to disrupt accumulations of wealth that really distort the prospects of other Britons, they have to pick a fight with the ossified upper middle class. The way forward might be a lower top rate of income tax exchanged for a lower threshold of inheritance tax. The moral signal would be unmistakable and Labour would deserve its name again.

Were it not for the quasi-feudal housing market, Mr Osborne could argue that his country has arrived at a sensible “British model” that other economies should emulate. We navigate between American flexibility and European welfarism. We have universal health coverage and loose labour laws. What we lack in productivity we atone for in employment.

But the property racket, and its fossilisation of the asset-rich, makes us look more like a rentier economy than the property-owning democracy of lore. Building more houses will not, by itself, restore sanity. Britain’s growth rate over the past three years testifies to something going right.

For that, Mr Osborne must change a tax system that was designed before returns to capital (and especially property) greatly outstripped returns to labour. The Tories cannot be the workers’ party until they discriminate, proudly, between those who earn their money and those who fluke their way into it.


Copyright The Financial Times Limited 2017. All rights reserved.

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