The British public will never forgive Labour’s latest cruel pension raid
The Government is demonstrating a basic misunderstanding of modern mixed economies
HMRC has confirmed that under new Inheritance Tax (IHT) rules, pension savings will no longer be able to be passed on tax-free, whatever age a person dies. Under the current rules, just over £1m could be left to beneficiaries tax-free as long as the deceased died before the age of 75. Now someone aged, say, 50, with a substantial pension pot that they had saved for thirty years, will have their pension pot added to their estate, and taxed at 40 per cent. The Government estimates that by 2029-30 this would raise £1.5bn in additional taxes. Maybe, but the Government is showing here and elsewhere some very basic misunderstanding about how modern mixed economies work.
If you live in a totalitarian state, then static tax calculation might be a reliable forecast method. Suppose personal income in this imaginary state is £100bn, and the income tax rate is 30 per cent – then the Government will receive £30bn in income tax. Adding one per cent to this tax rate will add pretty much exactly £1bn in additional revenue. This is because workers and consumers have little or no choice in what they do, where they work, and what they consume. The 20th century has seen these nightmarish states rise and fall (Stalin’s Russia and Mao’s China), and these regimes crumbled in persecution, murder, poverty and mass famine.
But 21st-century Britain is a lively, open, mixed economy, where consumers, workers, producers and savers have more choice than ever before. International trade, open borders and the internet have made this a reality for almost everyone living here.
So when the Government makes a tax change which adversely affects an activity, a sector, or a particular demographic or economic group, the resulting tax revenue is not simply a matter of multiplying the additional tax rate by the original tax base. Far from it. If pension pots start to be taxed early under IHT, then savers may choose to save most of their retirement money in ISAs, which are very flexible and (so far) safer from government interference. This contrasts with pension pots, which savers cannot get their hands on until they are 55 (57 from April 2028). Or perhaps savers might choose to up-size the family home, which benefits from some IHT relief if passed on to family members.
All of this is very well known to economists (which Ms Reeves purports to be), and popularised in the 1980s by an American economist called Arthur Laffer (of the famous Laffer curve). He advised President Reagan on the great mid-1980s US tax reform, which kick-started America’s revival as the global engine of economic growth. Ms Reeves would do well to read Professor Laffer’s research – he can show her how to kickstart growth.
0 Comments