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Inheritance tax: Why Labour doesn't get it

The Observer carries a story that the Government is contemplating announcing a suspension of its inheritance tax cut in the Pre-Budget Report.

The aim will be to put pressure on the Tories by increasing the price of the Osborne pledge.

I think Labour has the politics of this wrong.

Let me start with a couple of small points before moving on to the main one. The Government has ceded the principle on inheritance tax and a delay will therefore give the Tories little trouble.

George Osborne had already announced that he wouldn't implement his inheritance tax cut in his first budget, so he will be in a position simply to agree that delaying the policy is the right thing.

In previous elections, the total amount of the Osborne cut might have been an issue by creating a "black hole" which the Government would make bigger by delaying their move. But this won't work this time because the overall borrowing black hole is so large that it dwarfs any point about Osborne's cut.

These points, however, are secondary ones. For what labour has really got wrong is people's attitude to inheritance tax.

It is a perfectly reasonable hypothesis that people regard inheritance tax as a good tax. It is imposed on children who haven't earned the money. It doesn't tax the endeavour of the taxpayer. Only a small proportion ever pay it. It redistributes wealth.

As I say, it is a reasonable hypothesis that inheritance tax would enjoy public support.

But it doesn't. And George Osborne knew that before he made his announcement.

It turns out - from intensive polling - that people regard IHT as fundamentally unfair, taxing money that has already been taxed. Many voters fear they might pay it because they don't think the thresholds will keep rising as they have.

This support holds even when they are pressed on the negative arguments.

Voters don't think any tax cuts would be fair right now because everyone is facing spending, benefit and pay cuts.

But as a policy in itself? An IHT cut is a winner.

Tim Montgomerie and tax - take two

Tim Montgomerie has written on his blog a couple of times that he couldn't support tax rises until all opportunities for saving have been exhausted.

And I have replied that it won't work like that. Saving will take time. You will have to raise taxes first, if at all.

Now Tim has replied to me. And has been unusually imprecise.

He writes:

I agree that it'll take time to identify all savings (although it's also going to be difficult to produce reliably fast tax receipts) but there are a three big reasons why I believe I'm more right than wrong to focus squarely on spending.

But I was not saying that he was wrong to focus squarely on saving.

He is right about this.

And he is right, too, to be concerned about whether the Conservative Party - or indeed anybody else - is really serious about saving money. He would be correct to add that the Conservatives would be wrong to put up taxes if they weren't intending to exhaust the opportunities for saving.

However, his original point was different. He said that they should not put up taxes until they had exhausted the opportunities for saving.

My objection - an important one - was to his proposals on timing. Replying - correctly - that Tories need to focus on making savings is not a response to my point.

Clarifying Cameron's views on the 50p tax

Fraser, who is making some strong and worthwile points on public spending at the moment, seemed to me to slip up when it came to tax this weekend.

He writes the following in the News of the World:

Take the 50p tax on the super-rich. It's expected to prompt 25,000 top earners to leave, destroying 130,000 more jobs.

It's a crazy proposal. As Cameron says: "I think it's rubbish. I think it's a really bad idea." But, he says, he'll do it anyway.

I have often debated with him about the need for precision in these things. So let me return to the charge.

Cameron did not say he would do it anyway. The 50p tax will have been imposed before the Conservatives take office.

So Cameron is saying something different - that he will not reverse it. This is an entirely different policy, with a different implication.

Will the 50p rate be a winner for Labour?

Populus have a poll in this morning's Times which reinforces the message from other quantitative polls and which I understand has also emerged from Labour's qualitative work.

Voters agree with the new 50p tax rate.

Does this mean that is a winner for Labour?

No. At least I am not certain that it does.

My theory is that the 50p tax rate is a little like Tory immigration policy before the election. Base voters agree with the policy. Even swing voters approve. And yet it actually detracts from the party's appeal.

When people vote they chose a party that can govern, that provides them with a broad and generous vision. Voters don't like parties that seem ideological, extreme and obsessed with target groups. Even if they share the obsession.

They are also deeply suspicious of policy announcements by politicians and dubious about whether what they are being told will actually happen.

Logic suggested that asylum and immigration was a winner, but it wasn't.

Could the higher rate work in a similar way?

Budget: Darling does the Tories a favour

Predictably - and entirely understandably - Conservative Home has called for the Conservatives to reject the 50p tax rate.

And (this will surprise Tim) I agree. This tax rise is an outrage. It should be vigorously opposed.

But it is important to note a subtle but highly significant shift from the 45p measure to the 50p measure. Darling changed the timing.

By moving the tax rise into this Parliament Labour has massively reduced the Tory dilemma.

The 45p measure would actually have fallen to a Tory Government to introduce. If they pledged not to introduce it there would be a black hole. But if they did pledge to introduce it they would be putting an unacceptable measure on the statute books in their first Finance Bill.

A true dilemma.

Now, however, Darling will be introducing the measure and the Conservatives both can and should robustly oppose it.

They can then say it is something they dislike and don't want, but add that this is true of a great deal of Labour measures. They can't unfortunately repeal all that Labour has done immediately, they have to have priorities.

And the first priority will be the NICs increase.

In other words, until now the Tories could not oppose the 45p increase unless they were actually willing not to do it and fill the hole with some other measure in a campaign. Now they can distinguish between opposing it and giving an instant promise of repeal.

In his post, Tim mentions opposing the tax and not accepting the tax. he doesn't mention promising to repeal it. So perhaps he is open to my formulation.

Tory Tax: An interesting analysis

I strongly recommend Steve Richard's column this morning. He accompanies a sophisticated analysis of the Tory tax and spend problem with a very interesting account of Tony Blair's approach to policy making.

It's necessary reading.

My reply to Tim Montgomerie

Dear Tim,

Thank you for your reply to my letter on the 45p tax rate.

Let me begin with an apology. I described your original post as "uncharacteristically heated". You express surprise at this description. I am sorry if I mischaracterised you.

It was simply that in the comments underneath your post you said that you were "very fired up" and also called yourself "angry". So I thought "uncharacteristically heated" was a reasonable description.

Anyway.

In your reply you said that you didn't need any reminding that there was no money. You pointed out that when I was supporting the matching of Labour's spending plans you were calling for lower state spending. So you were in a stronger position to make this point than I.

No.

First, I supported a policy of matching Labour's spending for two years out of the last ten. I thought this would be necessary if there was a Tory government in that period. However, unless I have been misinformed, there was not a Tory government. Thus the policy of matching Labour's spending even if it was mistaken was, as things turned out, irrelevant.

Second, and far more important, is that you did not support a reduction in public spending so that there would be money where now there is no money. You supported it in order that there would be tax cuts.

You repeatedly argued (including in radio debates with me) that the party should announce tax cuts early. You said they needed to make the argument now. That was why you wanted the lower spending plans.

This policy (also the policy of the David Davis leadership campaign) would have been an utter fiasco and left the Conservative Party in a complete mess.

As I tried to tell you at the time.

You make some very good points towards the end of your reply.

I think, yes you are right, the Conservative Party should say that it has to see the books before it makes changes to tax and spend. Does anything seem familiar about this point? Ah I think I remember now. It is the point I have been making to you insistently for about four years.

Now, finally, what about the 45p?

I don't think George Osborne has changed the position on the 45p at all. When it was announced the Tories said they would not regard reversing it as a priority.

The idea was not to have to fight the election with only one watertight commitment for the first budget which would be to find £2bn to reduce tax for people earning £150,000 or more. Is there politics in this? Of course there is.

All the best,

Daniel

Open letter to Tim Montgomerie

Dear Tim,

Once someone has made a public declaration it is very hard for them to backtrack. So perhaps I am asking too much when I suggest that you think again about Tory policy on the 45p rate. Particularly when you expressed your opinion in uncharacteristically heated terms.

Nevertheless I have sufficient respect for your political nous and for your influence to give it a go. I hope you don't find that excessively irritating.

Let me start by saying that I understand why you have a visceral reaction to the 45p rate. I share it. This is not a good policy. And if the Conservative Party was starting with a blank piece of paper, it neither should nor, I think, would, introduce it.

But.

Let me begin my argument with the central inescapable fact in British politics.

There IS NO MONEY. The next Conservative Government will spend its entire period in office making hard decisions. It will not have to choose between hard decisions on tax and hard decisions on spending. It will have to do both.

The previous debate that you and I engaged in - should the Tory party commit itself to upfront overall tax cuts - is now redundant. There can be no question of anyone promising upfront overall tax cuts.

So at the election the Conservative Party will have to hang tough on public spending.

And it is doing so. There is a great deal of casual talk about cutting spending among Tory activists. Keeping spending growth below the level that Labour now plans will be very hard indeed. Very hard.

I agree that Government currently does things it should not do and money can be saved. But each act will be a huge political battle with vested interests who represent real voters. It has to be done. But don't go thinking the Conservative position at the moment is soft. It most certainly is not.

Which brings me to the nub point.

Labour in office retains one critical political advantage. It retains the ability to set the political baseline. And policies are judged by how they depart from the baseline.

Whether one likes it or not (I don't) that is how media debates on policy play out.

Gordon Brown understands this. It has been one of his most important political weapons over the years. And it is the reason he announced his 45p tax rise in the first place.

He realised he couldn't actually introduce the rise but he could turn it into a political baseline. And the Tories would then, if they wished not to introduce it, have to announce that that they would find the two billion pounds elsewhere.

(And here's a vital point - if the Tories argue that the 45p doesn't raise any money they would have to find the money elsewhere anyway).

If the Conservative Party announced that reversing the 45p would be a priority, they would be running in the election saying the following:

We've looked at the books. We can see that there is no money. Gordon Brown has left us with unimaginable debt and his forward plans are unaffordable. We have hard decisions for years to come. We have abandoned many of our plans for public spending. We are going to cut Labour's plans down and services will feel the pinch.

We're sorry, but we can't help it. We'll get things going when we can.

Oh, but just as a start we don't need the £2bn that Gordon Brown was going to raise from people who earn more than £150k. We will find that by cutting spending even more. Vote Conservative.

Can't you see Tim that this isn't an election winning position? I believe you can. You may not, ideally, want this new rate. And you have, understandably expressed your frustration and anger.

But the politics are surely compelling.

Aren't they?

Yours with friendship and respect

Danny

A return to the tax issue

Yesterday my old colleague Nick Wood wrote a piece on Conservative Home about Tory prospects. Interestingly, Tim Montomerie singled this piece out. He said that he regarded it as the best piece he had ever published on the site.

I say interestingly, because Nick made this observation:

At some point in the next 18 months, they [the Tories] will inherit the worst legacy of any party since the war.

They will have to be ruthless in pruning Brown’s client state, they will have no choice but to raise taxes higher still [my italics] and they will have to find a way of ensuring that the City never again brings the country to its knees.

Do I take it that Tim singled the piece out because he thinks this a reasonable judgment?

Talking about tax with Fraser Nelson

The Spectator has been sporting enough to host a debate on tax and spend between myself and Fraser Nelson.

Make of it what you will.