James Graham has done the short version of the Georgist objections to Conservative Plans over Stamp Duty and Inheritance Tax and, whilst I have blogged in the past about why we should indeed abolish IHT completely, I spotted this yesterday on "The First Post" which I think highlights a common confusion about IHT and, in particular, "real property" - ie your home...

Arguments for and against inheritance tax:

ARGUMENTS FOR (abolition/reform):

Inheritance tax no longer fulfils its original intention. Initially designed to raise money from the very wealthy, it now penalises more and more members of the middle classes. The very wealthy, however, can often afford financial guidance and find ways to avoid having to pay.

If that's what people are basing the inherent unfairness of IHT upon then I think they are wrong. Whilst one cannot argue with the second sentence (and the LVT solution would solve that fairly) I am not at all sure from the history of the various Estate Duty, Capital Transfer Tax and then Inheritance Tax regimes leading up to now that the tax was in fact "initially designed to raise money from the very wealthy".

In 1857 tax was due on estates above £20, though apparently rarely collected unless the estate was over £1,400. Using the RPI these two sums equate to just £1,200 and c£90,000 in 2006 prices, or £33,000 and £857,000 using average earnings indices. No, given the discussions around the various ways of levying land taxes in the People's Budget of 1909, I believe that death duties were intended to capture land value increases in a way that would not impact on the owner while they were alive.

It just so happens that around the turn of the 20th century, most land was in the hands of the "very wealthy" - landlords and large real estate holdings. Now, whilst it is much more widely spread, the increase in land values, seen especially in the past decade, are still a problem which the lifting of IHT thresholds will not address, in fact as James Graham points out, will exacerbate.

One other of the arguments for abolition in the First Post article goes as follows:

In taking a share of money from people who have already contributed income and capital gains taxes, inheritance tax is a form of double taxation.

This too is to misunderstand the nature of property price rises, where the increase in values comes from and so on. The property owner has not paid tax on the capital gains in their first home at least. Nor have they paid income tax on that increase. They may (but not necessarily I suppose) have paid income tax on the money used to buy the property in the first place. Nor have they contributed much, if anything, to the increase in value. That comes about because the location becomes more popular - more people need to have access to that location or ones like it. It is a monopoly profit in a zero sum market. Contrast this with the profit made from healthy economic investments such as equity in companies which only arise because someone, the company, is creating additional wealth.

Yet in attempting to take the family home out of IHT the Tories are doing precisely the opposite of what is fair and equitable. The monopoly "real property" profit the family is allowed to keep, whilst healthy investment assets are more likely to be taxed, if anything is. Of course I do not believe in waiting till someone dies before collecting the land value from the estate. It should be, as Adam Smith, Milton Friedman and Winston Churchill suggested the main or only form of taxation. Such would keep house prices down, allow people to save the rest of their income in productive assets instead, and be difficult to avoid, even for "non-doms". Then abolishing IHT would make sense, taking all the other productive capital assets out of what is a pernicious tax.