Hoodwinkonomics

George Osborne and David Cameron write in The Times today about the reasoning behind the inheritance tax cut:

“It can only be right that when you’ve worked hard to own your own home, it will go to your family and not the taxman.”

Change “taxman” to “the organisation that redistributes money to invest in public goods, redresses market failure and provides help for those that need it”.

Change “family” with “people who haven’t necessarily earned it”.

Change “It can only be right” with “In the social circles that we live, in everybody thinks”.

This sentence encapsulates the way that illusory language can be used to make deeply divisive policy sound so sensible.

But The consequence of decreased inheritance tax is a significant increase in inequality of opportunity.

If we take the example of inheriting a £1,000,000 house there are several worrying economic aspects involved:

1. For someone on the average full time wage* it would take them about 37 years “earn” that much money – and that’s before they paid any income tax or paid for anything else!

2. For someone to buy that house with a 100% mortgage the compounded interest would mean that it would cost them more than twice the actual value.

3. For the person who inherits the house, its value exponentially increases – either from the natural long term increase in property values, income generated by letting out the property or, if the house was sold, via compound interest payments on the cash value of the sale.

4. Solo inheritors will be massively advantaged.

There is an argument that the home owner may be suspicious of what the state would use the money for. This could be alleviated by a direct transfer of assets to the community rather than the asset value being subsumed into the state coffers.

But above all, the advantage that this tax reduction will give to the inheritors is so disproportionately large to what they could expect to earn in their lifetime that this is clearly going to lead to massive disparity in opportunity.

*From Wikipedia refencing Russell Lynch (2012-11-22). “Women close pay gap but earnings lose ground to inflation – Business News – Business”. London: The Independent. Retrieved 2013-12-30.

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