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February 11, 2013

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william

Screw efficiency, what's wrong with forcing them to go into the labour market and then fail miserably? The inheritance tax would pay for their meager dole.

Stuart

Chris. To say 'all the children of the rich...' does you a disservice. There are plenty who aren't. Who maybe run a family firm, but by some silly wet definition are 'rich'. You don't have to think very hard to think of some, although Polly Toynbee fits your definition pretty well.

Inheritance taxes are by definition, optional, as long as you can gift money. So the only people who will lose out are the first-generation succesful, who won't appreciate that they'll get caught.

Aveek

I don't think this is a paradox - at most you just show that (some) people who currently favour higher inheritance tax face countervailing reasons to cut it, and (some) who want to cut inheritance tax face countervailing reasons to raise it.

That says nothing of how strong these reasons are, and gives no indication hat the considerations you present here outweigh the considerations people currently take account of i.e. that they would change anybody's mind. Surely it isn't that astounding that sometimes there are points both in favour and against a policy?

Moreover, however useless the children of the rich are, you need quite an argument to show their labour participation is actually *harmful* rather than merely negligible. If they want to work, but can't get jobs, how does that mean less efficiency? I accept Osborne is a pretty good counter-argument on that score.

chris

@ Aveek - if rich kids need to work, they might well use family connections to get responsible jobs which they subsequently screw up. In this sense, they might do real harm. This would also be the case if they do a competent job of rent-seeking.
@Stuart - the IHT threshold is £325k, which is over £100k more than median wealth, even including pensions:
http://sticerd.lse.ac.uk/dps/case/cr/CASEreport60_summary.pdf
It's not unreasonable to define someone with such wealth as rich.

FromArseToElbow

"The sort of people who instinctively oppose inheritance taxes tend, I suspect, to believe the rich pass on skills to their children".

Or maybe they fear that they don't, and that their little darlings would be incapable of flourishing in an open labour market. The defence of unearned privilege requires no rationale beyond self-interest.

Anonymous

Don't moral philosophers, notably Nozick and Rawles, argue that entitlement to property arises from effort? So if an individual applies effort and adds value to a commodity by transforming it into something socially useful then a moral entitlement ensues? Following this principle through leads to the conclusion that those who do not contribute, but who are able, have no entitlement to property. For this reason, the issue of inherited money needs to be revised in my view.

A comprehensive income tax would be a way to address issues of equity and efficiency. Under comprehensive income, inherited money, capital gains and revenue income are rolled into one and become indistinguishable one from the other.

An individual's income tax rate is then determined by summing their comprehensive income received to date and dividing by the hours worked to date. This would yield a comprehensive income received per hour. A (progressive) income tax rate would be determined as a continuous function of the hourly rate of income. The tax rate so determined would approach 100% at very high hourly rates of income and would approach zero at very low income levels. If the denominator is zero (ie no hours have been worked) then the tax rate would be 100%

Anonymous

cont'd
So a toff who inherits £4m, but who has not worked (no hours of work recorded at HMRC), would pay tax on the £4m at 100% (ie they would pay £4m in income tax). Their entire inheritance would go to HMRC but with the possibility that it would be released in instalments according to the toff's contribution to society

If then our lazy toff gets a job and works 100 hours in the following month then their tax rate would fall to say, 99.99%.

So their cumulative income tax liability would now be 99.99% x (£4m + earned income in month). Ignoring the month's income, the toff's income tax liability to date would now fall to £3,999,600. Since they have already paid £4m in tax, HMRC would refund them £400. So provided the toff keeps working and contributing to society, their legacy would be released to them in instalments by HMRC via tax rebates. Rebates would be received in addition to the toff's directly earned income. If the toff stops working then so do the tax rebates.

This system incentivises toffs to work for their inheritance in proportion to their (inferred) contribution to society. Toffs that don't contribute their imputed talents would get taxed at 100% on their inheritance. A toff who works consistently over their lifetime has the potential to benefit in full from their inheritance - it is up to them. If they choose not to contribute to the commonwealth through their work then the commonwealth will benefit from their inheritance instead.

For such a system to work it is necessary to have real time processing by the tax authorities. HMRC is moving to real time as we speak. It would also be necessary for HMRC to record hours worked per month for every individual in the land so that the cumulative figure at any point in time is known. Some way of authenticating these hours will be needed (this is easily done for employees taxed under PAYE via employer returns).

Those who are unable to work, or who have lost their jobs, would receive monthly credits for hours worked. This would trigger automatic tax rebates for those who have paid tax previously.

For those unable to work (through disability etc), a negative income tax would be operated by HMRC to ensure that such people are adequately looked after.

Does this address the issues of efficiency and equity outlined in Chris's post? I think so. Fantasy? Perhaps. Feasible? Yes!

Sue R

That's Tara Palmer-Tonkinson, not the Ecclestone lass.

Sam

@chris: The figure that you quote for median wealth is over all households, isn't it? When talking about IHT, you should be talking about the wealth distribution of people who are actually likely to die.

From the report you linked, median household wealth for the 55-64 age group is £420K. Older people have less wealth - in part due to converting it to a pension one way or another, and in part due to giving lifetime gifts to their kids in the hope of living long enough to avoid IHT.

Mr Wallis

http://www.reddit.com/r/IAmA/comments/18bhme/im_bill_gates_cochair_of_the_bill_melinda_gates/c8dbtcb Bill Gates talks briefly about his decision to leave his children $ 10 million rather than a lot more

Steven Clarke

I think that the tax burden should fall more heavily on unearned than earned income. It doesn't take any effort to be born to rich parents, so some form of heavy tax on inheritances (above a reasonable threshold) is in order.

It could be redistributed as a Child's Trust Fund or citizen's income or some such scheme. We would be redistributing the large unearned income of Toff's children to give a small amount of unearned income to everyone.

Another source of unearned income in our society are rents going to landowners. A land value tax would sort this out, and be redistributed by cutting taxes on earned income.

Anton

It's not a question of incentivizing someone to work. The question is does this work contribute anything to society as a whole. Incentivizing/forcing someone to work just for the sake of it,or to teach them a lesson or to satisfy some high moral judgement is stupid and backword. Just look around in your daily life (especially if you work in a bank where most rich kids first end up) and judge for yourself if half of all this work brings anything worthwhile to society. In the coming age of automation human work will almost always be inferior to the ones performed by a machine. So if humans let the machine do the work and we just lie up on the couch Is this bad? Does that make us poorer?

rogerh

Hang on, there is something odd about this argument. The very rich seem irrelevant to the tax system - too few and easy avoiders. What matters is the immobile fairly rich who exist in worth-taxing numbers. So a tax to transfer wealth from the fairly rich to the not very rich seems the more practical approach.

Whether skills really are passed on by genes or environment seems doubtful. De facto selective breeding has existed in Britain for many years and the results are visible as Cameron and Clegg. More effective has been the selective accumulation of wealth. The very rich will burn themselves out, it is the fairly rich who can be farmed forever.

aragon

There are at least five justifications for IHT/Estate taxes and only one, the Bill Gates (actually Andrew Carnigie) example given in the comments above is about the recipients.

Chris's paradox does not exist with the other justifications.

Current IHT is 40% above the threshold of 620,000 per couple, only 3% (20,000) out of the population (63.5m) pay IHT.

The reciepts from IHT were only 2.91Bn in 2011/12.

Loopholes.
http://www.telegraph.co.uk/finance/personalfinance/expat-money/8094031/10-legal-tips-for-avoiding-UK-inheritance-tax.html

IHT has a lot of potential for the deficit fetishists.

Keith

Taxing inheritance and gifts seems a reasonable way to reduce the unfair advantages enjoyed by the descendants of the wealthy. I think your discussion chris is silly; as there is no way in practice to know how a large inheritance will affect future economic decisions by the beneficiary. You can only guess what will happen on average. Extremely large fortunes probably result from a large element of luck and tell you nothing about the genetic or other abilities of the wealth owners biological children. It is the greater welfare of the mass of the population that is the more important issue not how much we like or hate George Osbourne or people in the same situation. If the state does Socially useful things with the revenue it is a good policy but not so good if the revenue is used for spending that is irrelevant to human happiness. Ideally the revenue from targeting the small minority of wealthy families should be targeted at helping the most objectively disadvantaged members of the community who have not had a good family background or start in life for other reasons.That is the basis for making a informed Judgement about such a policy.

Tammly

This piece is fallaceous. The inheritors of wealth are equally likely to be industrious contributors to society or dunderheaded wastrels. The argument has no merit.

Dr Dan H.

The purpose of tax is to raise money for the government, by the easiest and simplest method. Tax ought not be used as a way to try to right perceived social ills, since all this does is creates an arms-race between the rich and the government, which the government inevitably loses as rich folk take themselves and their money to places less kleptocratic.

Inheritance Tax ought therefore to simply be abolished. The money it aims at has already been taxed as it was earned, and taxed once more (at least) as savings; trying to take one more bite out of it when the person dies is greedy, churlish and frankly downright unfair. The more we simplify the tax system, the fewer hiding places there will be and the less cost shall be inherent in running the system.

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