Certainly, a lot of the defences of inheritance look pathetically weak. For example:
“Because a parent’s income was taxed, taxing inheritances is a form of double taxation.”
But the same is true for most incomes. When people buy the Investors Chronicle – thus handing money over to me - they do so out of taxed income. Should I therefore escape income tax?
“People should be able to provide for their kids.”
Most recipients of inheritances, however, are middle-aged. And the prospect of a big inheritance can actually damage offspring, by reducing their self-reliance and incentives to work and save. As John Stuart Mill wrote:
Whatever fortune a parent may have inherited, or still more, may have acquired, I cannot admit that he owes to his children, merely because they are his children, to leave them rich, without the necessity of any exertion… in a majority of instances the good not only of society but of the individuals would be better consulted by bequeathing to them a moderate, than a large provision….I see nothing objectionable in fixing a limit to what any one may acquire by the mere favour of others, without any exercise of his faculties, and in requiring that if he desires any further accession of fortune, he shall work for it.
“Inheritance tax punishes aspiration.”
In most cases, though, the aspiration is an illusory one. HMRC data show that of the 279,301 estates that were left in 2012-13, a mere 6.4% attracted tax. Even if the IHT threshold were greatly reduced, only a minority would pay it.
This, though, brings me to why I favour inheritance taxes. It’s an opportunity cost argument. We should think of every penny of inheritance which is not taxed as a penny which has to be raised from income taxes. Low inheritance tax thus means high income tax.
From this perspective, those who want tax-free inheritances are exactly like benefit scroungers. They want something for nothing at the expense of hardworking tax-payers. It is, therefore, the lack of a serious inheritance tax – and thus the higher taxes on workers, savers and entrepreneurs – that is truly an attack upon aspirations.
If – as I find plausible – the prospect of getting an inheritance reduces (pdf) labour supply, then optimal taxation might require big (pdf) inheritance tax rates; these might be less distortionary than income taxes.
Now, this is not to defend the existing IHT system, which has many demerits – not least of which is that it imposes upon people when they are disorganized and distressed. I would favour a tax on lifetime receipts of the sort suggested (pdf) by the Mirrlees commission. Surely, there is something fundamentally unjust about being able to get £500,000 tax-free from not working, when the same sum obtained by work would be heavily taxed.
I suspect opposition to sensible inheritance taxes owes more to the rich’s colossal sense of entitlement than it does to justice or economic efficiency.
A side-point. One might argue that having talents which can earn you a good income is, morally speaking, just as arbitrary as having rich parents. This, though, is an argument for taxing inheritances and labour income the same – not for taxing the latter more heavily. In fact, given that making money from one’s abilities requires one to sacrifice time and freedom and enter into relations of oppression and domination, horizontal equity requires that inheritance be taxed more heavily.