Dumber than a bag of hammers

The tax proposals outlined by the Tory Shadow Chancellor to the party's annual conference this week are strikingly dumb, as well as being way out of line with the party's presumed "principles". If elected, the Tories plan to reduce the burden of taxation on unearned income (inheritances) while boosting it on earned income (as represented by the demonised "non-doms"). They will also in all likelihood pump the housing bubble up even further. Nice one, George.

The party's distaste for inheritance tax was made clear in the recent Redwood Report, which proposed replacing it with a reformed capital gains tax. As I said at the time, that's not a bad idea. However, the party has gone much further, with a plan to eliminate all inheritance tax on estates of less than £1 million, exempting family homes altogether.

The party claims that it detects a growing level of worry among taxpayers about the widening application of inheritance tax. Actually, it's not the taxpayers who are worried: they'll be dead when the tax comes through. It's the people hoping to benefit from the bequests who are concerned. But should taxation policy be rewritten to exempt almost all bequests? The largest single item that most people pass on to their heirs is the family home. True, people have diligently paid their mortgages in order to own the place; but most of its value is a result of the surge in UK property prices that has resulted from the last deecade and more of low interest rates. The homeowners have not earned it in any meaningful way, and it's hard to make a case that it should be exempted from tax -- particularly when the Tories propose to make up the revenue shortfall by taxing earned income, of which more below.

At the other end of the housing ladder, the Tories plan to exempt all first-time buyers from property taxes on homes sold for less than £250,000. One can only imagine the chicanery this will lead to, as husbands and wives take turns being the "first time buyer" of their first two homes. And it would be naive in the extreme to think that the removal of the tax will do anything except push asking prices higher, eliminating some or all of the hoped-for benefit to buyers.

In a bigger-picture sense, the Tories' pandering to the UK property obsession looks badly misjudged. Property often seems like the main driver of the UK economy and the favoured savings mechanism for a large part of the population, at the expense of more productive investments. (When did you last see a column in one of the weekend money supplements saying "I don't trust the housing markets so I'm putting my money into stocks and shares"?)

If the Tories get their way, there will be no tax on the first-time homebuyer; none on sales of the family home during one's lifetime; and none on the family home as part of a bequest. Can it really be smart to exempt such a key sector of the economy so completely from taxation? The Tories have castigated the Labour Government for making housing unaffordable through excessively cheap credit: it looks like they intend to do the same thing through wildly favourable tax treatment.

What makes this so much worse is that the Tories plan to pay for this needless and dangerous giveaway to homeowners by means of a new flat-rate tax on non-domiciled UK residents. Everyone has been attacking the non-doms lately, and no doubt a tax on them will play well with Daily Mail readers, but does anyone know who they are and exactly how they are treated?

Well yes, actually -- I do. When I returned from Canada to the UK a decade ago, I was given non-dom status. (For what it's worth, I no longer claim it). Non-dom status allows a UK resident to avoid tax on assets held outside the UK and on sums earned outside the UK while resident here. It emphatically does not exempt people from UK income tax: money earned in the UK is taxable in the normal way, and any money remitted from abroad is also fully subject to tax.

For me, the main (in fact almost the only) benefit was that it allowed me to keep my "Canadian" capital away from the UK tax man, on the assumption that I would return to Canada when my assignment in London ended. So here's the first question for the Tories: I was already paying income tax on virtually all of my employment earnings, which I received in the UK. Would I also have had to pay your proposed £25,000 non-dom tax? And given that there is probably a huge number of non-doms in similar positions to mine, and a whole lot more in relatively low-paid occupations, how can you possibly expect to raise £3.5 billion from your new poll tax? Do you really want to drive away the entrepreneurial Europeans who have moved to London in recent years by doing something as ill-judged as this, in order to pump yet more money into the housing sector?

There are sensible things that could be done to reform property taxation, inheritance taxes and the taxation of non-domiciled residents. The Tories are proposing none of them.