Lessons from the past

Tuesday, 01 February 2011
Some interesting statistics on tax revenue past and present.

You can make your own judgments (if after four years of writing this column you have not already done so) from the fact that every year my wife buys me Whitaker’s Almanack for Christmas (luckily this is not my only present!) and every April I buy Wisden’s Cricketers Almanack. These two books keep me quiet for hours – perhaps this is why my wife buys it – I had never thought of that.

Statistics are not an end in their own right, however, but they record a snapshot of interesting activity. Historically, however, some figures stand out by their very contrast to current life. I am Chairman of the Chartered Institute of Taxation (CIOT) Succession Taxes Sub-Committee and I discussed with John Stockdale, the excellent Clerk to the Committee about our concerns of what inheritance tax (IHT) generates and whether it serves its purpose purely as a tax gathering exercise. And he and I wondered what tax we raised 100 years ago. Now, my collection of Whitaker’s Almanacks only goes back 40 years, so John enquired of Whitakers and their excellent archivist came up trumps. I thought you might be interested in what we found.

For 1909-10, the national income of the UK amounted to GBP131.7 million. Setting aside profits of the Post Office amounting to GBP18.2 million (interesting in itself you might feel!), Suez Canal dividends of GBP1 million and other bits and pieces, taxation generated GBP105 million.

If we look at the make up of the tax elements, customs and excise duties generated just over GBP30 million each, but income tax only generates GBP13.3 million in total, while estate duty (including some elements of the pre-1894 legacy and succession duties) raised GBP21.7 million, 163.7 per cent of the yield of income tax. Now admittedly, income tax had a maximum rate of one shilling in the pound (5p in modern parlance) but it is astonishing that income tax yielded so comparatively little.

Statistics are not an end in their own right, however, but they record a snapshot of interesting activity. Historically, however, some figures stand out by their very contrast to current life

Now of course, the tables are turned and the yield of IHT is roughly 0.5p in the £ of the income tax yield. It is also one of the more expensive taxes to collect, operates arbitrarily against those where property values are higher (who described IHT as a post code lottery) and most importantly has lost its logic after the FA 2006 changes. The excellent Giles Clarke dates the start of the decline of its logical integrity to the Finance Act 1986, and the hurried drafting of the provisions on ‘gifts with reservation of benefit’.

Governments may fear the political backlash of deciding to scrap a tax, but is there a reason for burying their heads in the sand and not at least instituting a general review of capital taxation? What is it there for? What yield is required for it? Where does it fit? At the moment, it is a mess, and many would feel that, logically, its sell-by date has come and gone. Just from the figures, it is clear that 100 years ago, it was low hanging fruit to be eagerly gathered in. Not today, I think.

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Martyn Gowar

Martyn Gowar TEP is a Partner in McDermott, Will & Emery UK LLP.

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