A case for inheritance tax

Devil's Kitchen and Jarndyce have been having a good argument about the merits of inheritance tax.
I'm on Jarndyce's  side - there's a strong case for it, in principle.
That said, Devil's Kitchen is right on two points.
1. The tax, as it currently exists, is deeply flawed. It's got so many loopholes that it is in effect a tax on bad luck and bad planning.
2. In theory, inheritance taxes can be a disincentive. if people work and save in order to leave money to their kids, taxing inheritance might reduce their work and savings. (only might - there's an income effect as well as a subsitution effect). And family wealth can indeed sometimes provide the necessary capital to start a business; Lord Hanson's business empire began with a gift from his father.
My suspicion, though, is that he's exaggerating this incentive effect. Indeed, inheritances can provide big disincentives, in two ways:
1. Why work, save and study if you'll inherit a fortune from daddy? For every Lord Hanson, I suspect, there are many more Tara Palmer-Tompkinsons.
2. Most inheritances come to us in our 50s or older. They can therefore boost our retirement nest-eggs, thus increasing early retirement, rather than encourage business formation.
The more powerful these  factors are, the more efficient will be a (proper) inheritance tax.
(For a theoretical analysis of the economics here, you might try this paper; the actual empirical evidence, however, on the (dis)incentive effects of inheritance is elusive.)
Where I disagree more strongly with Devil's Kitchen is on the justice of inheritance tax. Jarndyce is right to say:

Nobody's income is entirely down to luck; nobody's inheritance isn't.

More importantly, his implicit belief that such luck is a legitimate subject  of redistribution is right. This is because people's right to leave money to others, or to inherit it, is weak. Indeed, this guy's (pdf) argued that it's non-existent, and that inheritance should be abolished in total.
It is certainly the case that the libertarian argument against income tax - as a form of forced labour - is stronger than the libertarian argument against inheritance tax.
And yet this is the exact opposite of what our current tax system believes. You start paying income tax on earnings above £4895. But you can inherit more than 50 times this amount - £285,000 - without paying a penny in tax.
This, surely, is grossly unjust - and it surely destroys any pretence that New Labour has any egalitarian principles.
And what message is the tax system sending here? That however hard you work, it's much better to have rich parents?

Comments

[Guido Fawkes]

I'd rather have more Tara than Hansons.

She provides amusement for the many...

[Katie Bartleby]

This is because people's right to leave money to others, or to inherit it, is weak.

Isn't the 'right to leave money to others' a strong incentive to a) save and b) create wealth? Surely inheritance internalises those incentives: it's difficult to get people to give a toss about 'the good of society' but 'providing for your family' people are instinctively attracted to.

[dearieme]

Chat about "rights" and "justice" is all very well, but what about consequences? Think how many of the scientific advances of the 19th Century, for instance, were effected by men with inherited wealth who used their leisure to do far more long-term good for mankind than could conceivably result from that money having been grabbed by government. Add this point to Katie's and you still have some persuading to do.

[Devil's Kitchen]

This, surely, is grossly unjust - and it surely destroys any pretence that New Labour has any egalitarian principles.

Ah, well, you see, this is the problem, and I susoect that we won't ever agree because of it. I don't see the tax system as a way of being "just". Many people seem to be stuck in this mindset of tax as social engineering. As far as I am concerned, tax is a necessary evil levied upon everyone in order that the government can raise the money to provide services to everyone, e.g. the police, that need to be provided on a national basis. (Under that philosophy, the poor, who claim more benfits, are more likely to use the NHS and the state education system or to take up police time, should pay more. I'm not, obviously, advocating that.)

Besides, our current system is far from just. Money is taken from those who have earned and given to those who haven't. What is just about that? I agree that, in a civilised society, we shouldn't have people starving on the streets, and that the poor certainly shouldn't pay proportionally more tax than the rich, but there should be no bar to people handing money down to their descendants.

Why work, save and study if you'll inherit a fortune from daddy? For every Lord Hanson, I suspect, there are many more Tara Palmer-Tompkinsons.

Well, possibly. However, most well-educated people (and they will be if they are that rich) do actually have some drive to work. Usually out of boredom (I know, I went to school with many of 'em). Anyway, both of your examples are of the fantastically rich, not the moderately well-off.

And what message is the tax system sending here? That however hard you work, it's much better to have rich parents?

No. And since when did the tax system have "a message". Cripes, tax system as PR man! What it does do is encourage people to save for, not only their future, but also their childrens'. What is fair about taxing the inheritors of someone who has saved their money (and we are not talking only the massively rich here), but not taxing the inheritors of someone who has just spent as he earned?

The point being that, if someone is well-off, you don't need to provide benefits for them. This means that they don't cost the state anything (in fact, they contribute through reasonable levels of income taxation). So the more wealthy people you have, the better (even if only in financial terms). In ideological terms, it means fewer people dependent on the state and that, in my view, can only be a good thing.

(Sorry, slightly rambling; articulating as I go!)

DK

[Blimpish]

Income and capital surely shouldn't be seen as equivalent? Surely what we could've accumulated through a lifetime of personal tax allowances should be protected at death, too? In that case, a 50-times multiple seems fairy nough.

Anyhoo, leaving aside all the obvious reasons why I'll disagree with the above (admirably expressed by Katie and Dearieme), let me add to Guido's point...

We know well that indivualist meritocracy per se hardly makes for the good society. Think Michael Young, etc. If you're theory of more Taras rather than Hansons being the result of greater inherited wealth, then maybe this will reinject some fluidity into the system, without compromising the idea of rewards following merit? Surely an egalitarian Leftist such as yourself, Chris, might find some (ahem) merit in that?

[Kimmitt]

"What is fair about taxing the inheritors of someone who has saved their money ... but not taxing the inheritors of someone who has just spent as he earned?"

People who pass on substantial amounts of money to their children aren't doing it to save the state money. They do it to pass on advantage/privilege. Is this not important? The particularly wealthy cost the state virtually nothing anyway.

You then complain about the notion that the tax system should have a "message" or pursue outcomes thare just rather than outcomes that are simply effective. But is a massively inegalitarian tax system not a barrier to social mobility, efficiency etc? In this instance, can't just outcomes and efficient ones go hand in hand?

[Devil's Kitchen]

"Income and capital surely shouldn't be seen as equivalent? Surely what we could've accumulated through a lifetime of personal tax allowances should be protected at death, too? In that case, a 50-times multiple seems fairy nough."

Pretty much my point.

BTW, Chris, my HTML italicisation doesn't seem to have worked (should have used inverted commas). Apologies for the resluting lack of clarity.

DK

[Jarndyce]

DK, I still think you're setting up that false dichotomy: inheritance tax versus no tax. Actually, the existence of taxation is not the issue here, but its correct mix. As I've said before, I'd tax in this order of priority: inheritance, talent/endowment, effort, with the last not being taxed at all. You prefer to tax hard work (income) rather than privilege (inheritance).

If we're not aiming for the most just system, how about the least unjust? Explain how taxing effort is less unjust than taxing luck. For me, the only issue is: exactly how much is it possible to extract in IHT? I believe that the answer may well allay the (empirical, real-world) fears of Katie, Blimpish and dearieme above: IHT at its maximum won't abolish inheritance altogether.

[Devil's Kitchen]

Jarndyce,

I appreciate that point. I am aware that IHT needs to be taxed at some level, but only for the sake of practicality.

However, I have also laid out my ideological and moral reasons for thinking that it is a bad thing. IHT taxes past effort and prudence, it's a disincentive to save and it perpetuates poverty by ensuring that everyone is either in hock to a bank or to the state. From my point of view, this is a bad thing.

The point is that IHT is not luck. I tried to say this earlier, but obviously did not succeed. Hypothetical situ.: my father starts off penniless, but by hard work, wise investment and self-discipline, builds up a reasonable fortune (let's say £1/2 million). He wishes to pass that fortune on to me, and also uses part of it to fund my education, university, etc. Very nice for me but it is not luck; it is paternal design. Why then, should 60% (as you advocated), of his wise investment then be appropriated by the government, to give to someone who has never saved? You are doubly taxing one person's prudence and hard work in order to reward another person's failure and indolence. I think this wrong.

The reason that I prefer income tax is because everyone who has an income pays it. This is fairer since, on the whole, the end recipients are the ones whose actual contribution (in terms of pounds, not percentage of income) are the ones who pay the least. Plus, of course, the more people that you tax, the less you have to tax them individually.

As I have said, I do not believe that, because someone has more money that they should pay a higher proportion in tax because I don't view having money as a bad thing in itself. Equality is a dirty word in The Kitchen, because no such thing exists. People are not equal in talent, so why pretend?

So why would you tax talent above effort? Because someone is talented at their job, would you tax them higher than someone who tries hard but is still useless? Isn't that just denying the reality of the nature of the human animal?

DK

[David H]

It feels slightly bizarre to be the one defending Tara Palmer-Tompkinson but someone has to point out that she isn't actually an heiress - her parents are not that wealthy (though impeccably connected) and are still alive so she hasn't actually inherited anything. Yes, she is a sort of social butterfly but her money has come from either being in the right company or latterly (since I'm a Celebrity...) through various celebrity endorsements and appearances. In a strange sort of way she does work for a living.

[Devil's Kitchen]

She has "inherited" capital through a trust fund. Good for her. A plague on socialists. I am utterly bored of them; the politics of envy leave a sick taste in my mouth.

DK

[Tim Worstall]

I think everyone’s rather missing the point about Hanson and Tara.
1) As the old saying goes, the first million (or 100,000 if you wish) is the hardest. As someone who has run small businesses all my working life I agree absolutely. Inheritance of reasonable sums (in the 50k to 500 k range...and if not inheritance then gifts a la Hanson) are huge drivers of business formation.

(Slight point for Chris. No, you can’t inherit 285,000 tax free. Inheritance tax is paid on the estate, not by the recipient. So one can leave 285,000 to be spread amongst all one’s children, nephews etc.)

2) We have inheritance tax and Tara got money in a trust. So the current system does not abolish such privilege. The rich don’t actually pay it.

I would much prefer to see the abolition of inheritance tax, indeed, the abolition of all taxes on capital and savings. A Consumption tax in fact (no, this isn’t like a VAT).

Taxation falls only upon what is spent. All additions to and earnings from savings are tax exempt.(Yes, bye bye CGT, tax on interest and dividends etc). All spending from savings and earnings on savings are taxed at the regular income tax rate.

If you wish, a giant inheritable ISA for all of one’s savings, income tax being paid when you take money out.

[Devil's Kitchen]

I'm with Worstall (as usual).

DK

[Innocent Abroad]

I'm sure DK will be happy to know that a consumption (or expenditure) tax has, in the past, been advocated on impeccably social democratic grounds.

Can anyone explain to me why the tax system shouldn't penalise bad planning? (Other than the perfectionist view that citizens' behaviour is no business of governments, of course - I trust that all those who claim to hold this view are opposed to the existence of traffic lights and zebra crossings, too.)

[Blimpish]

Tim: lifetime consumed-income taxes are pretty hard to construct without requiring a bureaucratic form-filling - and the definition of 'saving' is pretty hazy. Does buying a consumer durable count as saving? How about transferring money to somebody else? All of these questions are solvable, but they get pretty hair-raising, especially if you're a libertarian?

[Devil's Kitchen]

I'm sure DK will be happy to know that a consumption (or expenditure) tax has, in the past, been advocated on impeccably social democratic grounds.

How dare you accuse me of being a social democrat?!!?!

(Other than the perfectionist view that citizens' behaviour is no business of governments, of course - I trust that all those who claim to hold this view are opposed to the existence of traffic lights and zebra crossings, too.)

I wondered when that load of old rubbish would come up. Nicely, innocent. In a pure way both of these things (though traffic lights more so) help to prevent any human being harming another, whether 'tis the person crossing or the person in the car. Thus it comes under my original prescription.

Does buying a consumer durable count as saving?

Well, of course it does, Blimpish. You will be paying imputed income on your hairdryer before you can say "knife"...
DK

[Innocent Abroad]

Which original prescription was that, DK?

I didn't accuse you of social democracy...

[Robert Schwartz]

As I have said before, liberalism fails when it enters time. Inheritance, like identity is an issue only for people who live in time.

Liberalism was constructed to rationalize property as a basis for economic activity. But if each member of liberal society is allowed to property, he must be allowed to alienate it, otherwise holdings will never go to the highest valued use. If he can alienate property he can give it to his children and you have inheritance. Which is fine. But if you have inheritance, then the initial condition of autonomous agents without preexisting commitments will never be meet, and you cannot have liberalism.

How to escape the dilemma? I say drop the theory. Procrustians say kill the lab rats.

[Tim Hicks]

Chris, there is support for your position from a rather surprising source (to my mind). One Irwin Stelzer has written a pamphlet making a case for 100% inheritance tax.

http://www.amazon.co.uk/exec/obidos/ASIN/187409778X/qid=1126861948/sr=1-9/br_lfbnb_b_9/026-0361634-7822862