Hamish McRae is one of the few economic commentators to emerge from the financial crisis with his reputation enhanced but his column on ‘recovery’ in today’s Independent falls foul of a common delusion.
The whole notion of ‘recovery’ is predicated on the belief that the current economy can return to its previous heights. But the current economy cannot return to the methods that triggered the crisis in the first place.
The springs of wealth, as Marx called them, will only flow more abundantly with the birth of a new economy not with the resurrection of the old.
Elsewhere in the piece, McRae reflects the new consensus that a mixture of spending cuts and tax rises is needed to plug the deficit. He writes:
“We should probably expect some kind of temporary increase in income tax, and not just for top earners. And other smaller taxes will go up too.”
There is certainly scope to increase the basic rate of tax, which currently stands at 20 per cent, its lowest level for 75 years. But both Labour and the Conservatives will surely want to avoid this politically toxic option.
A far better choice is to raise taxation on unearned income, notably inheritance and capital gains. The Conservative pledge to raise the inheritance tax threshold to £1million appears increasingly unsustainable and Labour should also now reverse its decision to raise the threshold to £600,000.
There is a strong, meritocratic case for increasing inheritance tax and it is one best articulated by Warren Buffet and other US entrepreneurs.
Buffet is keenly aware that dynastic wealth saps initiative and productivity and as such has pledged not to leave a significant proportion of his fortune to his children.
As he once noted: “I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing”.
A coalition of 120 American billionaires successfully campaigned against the abolition of the ‘death tax’ in the US. We desperately need a similar coalition to throw their weight behind inheritance tax here.
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