Outlook: Cascade of wealth presents Chancellor with taxing problem

The previous prime minister, John Major, spoke of "wealth cascading down the generations" and vowed eventually to abolish inheritance tax. The present incumbent has no such intention and even the Tory party has somewhat changed its tune. All Conservative Central Office will say today is that it is sympathetic to the plight of those who have to sell the family home to pay inheritance tax, but it has yet to decide its policy on the issue.

As things stand, inheritance tax is an important but not huge source of revenue for the Government. This financial year it was forecast to raise £2.5bn. But with growing wealth and rising house prices, more and more people are going to be caught by it and eventually inheritance tax might become a very considerable source of revenue indeed. There's obviously plenty wrong with the present set up, which is why the Fabian Society, a Labour-affiliated think tank, has produced a pamphlet on the tax, deliberately timed to coincide with next week's Budget.

The moral case for inheritance tax is a strong one. Is it really fair that chance of birth or friendship should entitle people to inherit large amounts of unearned wealth entirely tax free? In the US, there is already a sizeable backlash that includes some surprising people against the Bush administration's plans to abolish estates tax. Bill Gates Snr, father of the billionaire software tycoon, Ted Turner, Paul Newman and Warren Buffett have all put their names to the campaign for the fair taxation of unearned wealth.

None the less, inheritance tax remains a deeply unsatisfactory approach to the problem. As the Fabian Society points out, the tax has become essentially voluntary for the very wealthy because of the large number of loopholes in the present system. Trust law, the exemption on gifts made more than seven years before death, and the reliefs on private businesses and agricultural land provide the wealthy with all the get outs they need. On the other hand, the tax is hitting the moderately affluent in growing numbers, particularly in the South-east, where house prices have generally risen above the £250,000 threshold.

Inheritance tax is, in any case, a form of double taxation, since income and capital gains tax will already have been paid on any accumulated wealth. All wealth has been earned; it is only the recipient that may not have earned it.

The Fabian Society accepts the case for abolition, but suggests it should be replaced with something else – a capital receipts tax. This would change the basis of estate tax from the donor to the recipient, which, depending on the structure chosen, would be likely to leave many current taxpayers paying less or no tax at all. Loopholes and reliefs for the very wealthy would be closed.

The idea sounds fine in theory, but it's hard to make it work in practice, as Ireland, which has something similar, has discovered. Mr Buffett and Mr Turner may be in favour of inheritance tax, but they've got so much money that paying out half of it in tax is not exactly going to leave their children short. The fact is that most people are against all forms of inheritance tax, whether on the donor or the recipient. Getting rid of the relief on private businesses might remove the injustice of the present system but it would also drive successful entrepreneurs offshore, while as Ireland has discovered, enforcement of a capital receipts tax is a logistical nightmare, wide open to avoidance and evasion.

The problem with the proposal is that it is just too complicated. There's not much I would agree with George W Bush about, but complete abolition of inheritance tax seems to me the way to go. You can only take the idea of levelling the playing field through the tax system so far, and the point about inheritance tax is that it discourages wealth creation and retention to the detriment of all. Not that there's any chance of abolition under this Government, which needs every penny it can get.

Executive pay

We are not yet at the end of the annual accounts season. Those with March year ends are still to come. But already it has revealed an unprecedented glut of executive greed, made all the more remarkable by the fact that conditions in business are meant to be tough right now. Almost everywhere, salaries, bonuses and pension entitlements are rising, despite what has been for most another dire year for profits and share prices. The UK Shareholders' Association calls it "little more than legalised theft" but it's actually even more cynical than that. Many executives and boards are just helping themselves to what they think they can get away with in the certain knowledge that today's outraged headline will be tomorrow's chip paper.

None the less, there will eventually be a reckoning. The cumulative effect will be to pull the roof in on everyone. The proper conduit for restraint ought to be shareholder activism, but because fund managers have tended to pay themselves extraordinarily well for unexceptional performance too, activism has rarely worked in the way it should. In the absence of self restraint, companies can expect the sledgehammer of Government action instead.

Archie Norman's private members bill to clamp down on reward for failure died a death because the Government thought it would drive a coach and horses through contract law. Instead the Government proposes to reform the Combined Code in a manner that would limit pay-offs to, say, six months. Personally I've always liked the Paul Myners' suggestion that directors be paid off in shares. A director on a year's contract whose shares had fallen 90 per cent during his tenure would thus get only 10 per cent of a year's salary. That ought to concentrate minds wonderfully.

Press/regulators

Regulators make an easy target for financial journalists and as chairman of the Financial Services Authority, Sir Howard Davies has been at the end of their pen more than most. So he must have taken some pleasure in lambasting his audience as the guest speaker at the Harold Wincott Press Awards for Financial Journalism yesterday. Sir Howard thought the whole idea of such hardened cynics having their own self-congratulatory awards ceremony "rather sweet really".

And that was as sweet as it got. Sir Howard then launched into a no holds barred attack on the financial press's gullibility and lack of scepticism. How well had the British press done in charting and analysing the bubble and bust of the late 20th century and early 21st he asked? It was hard to give an unambiguously positive answer to that question. Sir Howard expressed amazement at the uncritical reception given to financial products, IPOs and takeover strategies, as well as the way the financial press consistently falls for the claims of self-interested lobby groups.

Sir Howard, who retires from the FSA in the autumn, didn't actually say it, but he might well have done. The financial press was a good sight nicer and uncritical about the dot.coms, Marconis and Enrons than it was about him and the FSA.

Much of Sir Howard's criticism is deserved. During the boom the financial press largely forgot its proper role as a watchdog and a professional sceptic. There was too much celebratory journalism about business and the City. He's right to call for more scepticism and less puffery. Unfortunately for Sir Howard he can never quite have the last word on these matters, for one of the joys of being a journalist is that the final word always goes to us.

Financial journalists may have been derelict in their duties in the bubble and bust of recent years, but where was the FSA, with its thousands of staff, to check the excesses of the bubble and correct the worst consequences of the subsequent bust? Regulators and journalists are essentially on the same side in their purpose of championing and protecting the public interest. We could both do a lot better.

jeremy.warner@independent.co.uk