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Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.

Sensible people believe that a high taxed economy is bad and a low taxed economy good. The classic case study of this was Cowperthwaite, as Financial Secretary in Hong Kong, who brought employment and prosperity to two million refugees, leaving Hong Kong with a GDP per capita significantly larger than that of the UK.

Secondly, wise taxation needs Laffer Curve guidance and appraisal. The concept here is of a rate of taxation which will optimise tax revenues: tax is not so high as to put people off spending, but high enough to optimise Income Tax. The taxation of cigarettes is an interesting case study here. Tax revenues from smoking would be substantially larger if tax rates were reduced, but this would mean more people smoking more cigarettes. This is a straight forward illustration of where tax policy can, rightly, be other than commercially based in specific circumstances.

It is self-evident that tax policies which are expensive to organise and to collect the tax are a bad thing – half the tax revenues can be lost in expensive collection. Higher rather than lower taxation of consumables normally makes sense as citizens have the choice of what and whether or not to consume most items. This is an argument for high rates of tax on luxury goods, mostly consumed by the rich.

I would steer away from tax policies supposed to lead to a particular economic result. There have been two tax policies in the last decade which have not achieved their alleged economic goals but have caused problems for citizens.

First is the huge increase in Stamp Duty on residential properties in the London area and particularly more expensive properties, regarding which I have written previously. As a result, the market has virtually dried up. Stamp Duty revenues have been much less than forecast. The professed objective was to make available more houses for the owner occupier market by reducing the Buy-to-Let market’s attractions for investors by installing higher taxation and higher Stamp Duty on Buy-to-Let. The relevant Treasury officials seem to have missed the point that the Buy-to-Let market and the owner occupier market are very much two separated markets; the relative pieces of property sit in one or the other market and rarely move from one to the other.

The second area in need of dynamic reform is Inheritance Tax.

All the surveys show that citizens of all walks of life dislike IHT and would like to get rid of it. When George Osborne announced at the 2007 Conservative Party Conference in Birmingham that he would raise the IHT threshold to £1 million (a policy which he never implemented in Government) this was very popular nationally. People see IHT as a form of theft or double taxation – taxing people on their savings on death, when they have already paid tax on the income from which the savings have been accumulated. The rate of 40 per cent, and the start threshold of £325,000, are penal.

There has been a global trend to get rid of IHT. Over the last 18 years, 14 OECD countries have removed the tax, including Sweden and Norway. Even India has abolished IHT, and the starting rate in the US is $12 million.

The UK’s penal IHT taxation combined with the tighter rules on domicile have led to a growing number of wealthy individuals leaving the UK, so reducing the overall UK tax take from wealthy non-doms substantially – a self-defeating piece of tax legislation.

IHT is a regressive tax, mostly avoidable by the more wealthy. Both politically and economically it would better be replaced by more progressive taxation. The removal of IHT would also encourage successful entrepreneurs to settle in the UK.

Fewer than five per cent of estates pay IHT: it raises around £4.5 billion per annum – 0.75 per cent of total, gross tax. Also, the net tax take is much lower owing to the high cost of collection of IHT. HMRC should be focussed on collecting larger amounts from richer and less costly tax streams. Getting rid of IHT would also offer the opportunity of getting rid of distorted investment behaviour for IHT reasons – particularly affecting land, these would become no longer necessary.

I am also horrified to learn that the Government has been cooperating with HMRC to reintroduce ‘Crown Preference’ – including VAT, PAYE and Employee NICS as priorities over debts owed by floating charges and unsecured creditors, in the event of business failures. Such plans pose a serious risk to UK business rescues and business lending.

In looking for replacement tax revenues the key ‘starter’ characteristics should be that the taxes are relatively cheap to collect. This makes VAT attractive territory: certainly, some of the areas enjoying reduced rate VAT (five per cent) could be brought into line at 20 per cent. VAT could be increased on luxury goods e.g. cars and jewellery. Post-Brexit we should no longer be constrained by pan-EU agreements on VAT rates and VAT applications. Some replacement of tax from income ought also to be automatic – e.g. the abolition of IHT is likely to result in many more people coming to live in the UK, in turn paying significant amounts of tax on their consumption of luxury goods and services.

Let us hope the new Prime Minister will seize the opportunity to get rid of IHT speedily which would be a correct economic and popular measure.

118 comments for: Howard Flight: Some guiding principles for Javid as he designs his tax policy

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