Johann Hari: Why is Labour selling its soul to right-wing myths?

A right-wing campaign to strangle one of the most progressive forms of taxation has just hopped, skipped and jumped to the victory post – in a Labour Comprehensive Spending Review.

Inheritance tax was introduced in Britain in the 1910s by David Lloyd George, the great radical chancellor. His goal was to erode the British class system, by chipping away at the ability of the rich simply to hand their wealth to their children, who would in turn hand it to their children, and so on and on, down the ages. He saw that having a sub-class at the top of society who live lavishly just because they popped from the right womb was bad for the economy and bad for society, so he began to tax this "unearned wealth", using the proceeds to create pensions for the poor. "Death is the ideal time to tax rich people!" he told a rally.

It worked well until, in the 1990s, a campaign was launched by right-wing newspaper owners to demonise this tax. They imported the Reagan-Bush-Cheney claim that it was a "death tax". In the past fortnight, David Cameron's Conservative Party aggressively picked up the core myths of this campaign – and the Labour Government has failed to answer them. Instead of challenging these right-wing myths, it has capitulated to them. Alistair Darling announced a new tax structure where, by 2010, it will be possible for a British citizen to receive a £699,999 bonanza they have done nothing at all to earn, and pay not a penny of tax. At the core of the campaign that has bullied the government into submission are three myths:

* Myth One: Until these changes, "ordinary people" were forced to pay inheritance tax. In fact, only the richest 6 per cent of estates pay a penny in inheritance tax. The remaining 94 percent of the population pay nothing. No economist disputes this. It is true that some people look nervously at their current house price and think it is close to the line for payment. But they fail to realise that virtually everyone spends their cash gradually in their old age, whittling down their estate to far below the taxable level. Darling's proposals have now whittled the pool of people who will pay down even further, to the top 3 per cent – making it a de facto tax cut for some fantastically wealthy people.

nMyth Two: Inheritance tax is a tax on "hard work" and "aspiration". This argument is bizarre. By definition, you do no work for your inheritance. You could lie in bed all day, every day, doing nothing but eating lard and belching, and you would still get up to £699,999 tax-free.

Slashing inheritance tax does the opposite of rewarding hard work. It creates an class of inheritees who have no incentive to work, since they will be rich no matter what they do. Strangely, the right-wingers who complain that the benefits system creates a "moral hazard" by giving people "money for nothing" see no moral hazard in doing exactly the same thing with the rich, with far larger sums.

* Myth Three: It's a form of double taxation. I paid tax when I bought my house, why should I pay again when I die? This argument fails a logic test. You paid tax when you acquired your house; when another person (say, your child) acquires the house, they pay tax too, because they are – wait for it! – a different person.

Of course, it's not surprising that the very rich men who lead the Conservative Party today should trot out these arguments. The shadow Chancellor, George Osborne, for example, is likely to inherit tens of millions.

But it is depressing that the Labour Party has not argued back. Inequality is now a major political issue in Britain: 85 per cent in the latest YouGov poll think it is too high. The whispers from Darling that the Government will finally act on the non-domiciled super rich, who currently disgracefully pay no tax at all, is a partial response to this mood. But inheritance tax is one of the oldest ways to erode inequality, and the best. Instead of making this case, the Government has caved in.Lloyd George would weep.