For inheritance tax

At Conservative Home, Matthew Elliott and James Frayne want to abolish inheritance tax. I'm not convinced.

Inheritance tax...is not simply a tax on the rich (who can and do employ expensive accountants to come up with ways of dodging it)...

This is a case for closing the loopholes, not for abolishing the tax.

...but affects ordinary families...A commitment to getting rid of inheritance tax would show the [Conservative] Party understood the concerns of ordinary middle class families.

It depends what you mean by "ordinary" of course. HMRC figures here and here (pdfs) show that in 2003-04 there were 282,102 estates bequeathed. Only 54,361 - 19.2% - were above the IHT threshold. Are the richest one-fifth really ordinary?

It is immoral because it forces people to pay tax on their possessions, having already paid huge amounts of tax throughout their lives....people understand the obvious immorality of what amounts to "double taxation."

No. IHT is not double taxation. It's paid by the living, not the dead; I know of no case of the taxman delivering a summons to the Pearly Gates. And if I inherit £300,000 or more, I'm paying tax on it for the first time.
If your're worried about double taxation you should fret about VAT. When we buy VATable goods, we are paying VAT out of incomes that have already been taxed. And you should fret about the taxation of interest on savings. Both are more obvious cases of double taxation than IHT.

According to a Populus poll for the BBC in March, people disagreed by 73-25 percent that inheritance tax was a "fair way" for the Government to raise money.

This only shows one of the more pernicious beliefs of the public. They're in love with the idea of getting something for nothing - which is why they play the lottery. What we need, surely, is to end this "summat for nowt" culture, and to encourage work and savings. That means cuts in income tax should take priority.

The abolition of inheritance tax should form part of a wider campaign to reduce the tax burden on families.

This misses the point that there's a trade-off. For a given tax burden - and I wholly agree this should be lower than it is - lower IHT means higher other taxes. And most of these fall upon more ordinary people than does IHT. In this sense, abolishing IHT is regressive, because it would mean higher taxes on other, generally poorer, people.

It is always dangerous to get into the game of "costing" tax cuts because tax cuts have "dynamic effects" - they create a "rising tide" which boosts the economy as a whole.

True. But is this really more true of IHT than other taxes? Would abolishing IHT really lead to more labour supply or capital formation than cuts in other taxes? I suspect the exact opposite. People who can look forward to a big inheritance have less incentive to save or work hard. Dynamic effects argue for cutting income taxes ahead of IHT. Feel free to show me hard empirical evidence to the contrary.
I'll finish with three questions. What's wrong with this argument (pdf) that there's no right of inhertiance at all? Why should you pay more tax if your dad gives you a job than if he gives you an inheritance? Given the choice, wouldn't you rather pay tax after you're dead than whilst you're alive?

Comments

[Tom Freeman]

"IHT is not double taxation. It's paid by the living, not the dead"

Right - it's a tax on a transaction, not a tax on possessions. And it has to at least as legitimate (indeed, more legitimate) to tax me on income that falls into my lap as a result of outliving my parents than to tax me me on income that I earn through my own hard work.

What do you think of the idea that IHT should be paid based on the amounts inherited by each individual named in the will, rather than the total of the estate? Seems fairer to me - after all, employee income tax is applied individually rather than to a company's total payroll.

[james higham]

"And it has to at least [be] as legitimate (indeed, more legitimate) to tax me on income that falls into my lap as a result of outliving my parents than to tax me me on income that I earn through my own hard work."

Why? It's not falling into your lap. It's a natural process. Why should the government get a slice of that?

[Matthew]

I wonder if there's a way in which you can accept (say) a 1% higher income tax in return for not having to pay inheritance tax? That would concentrate minds.

I think there's a mistake in your analysis. Around 600,000 adults died in 2003, so the % who might have been eligible for inheritance tax is less than 10% (and in fact I think only about half of those actually pay anything).

[dearieme]

"People who can look forward to a big inheritance have less incentive to save or work hard": and then again, may feel more inclined to take risky decisions/be entrepreneurial, given the back-up of the expected inherited dosh. Who knows? I sing my old song: reduce the RATE of IHT, reduce the threshold (£30k?, £20k?), close the loopholes, and you might end up with a better ratio of tax income to harm.

[Sam]

The big iniquity of IHT to me has always seemed to be that it introduces a tax on something which is usually untaxed unless death is involved - the act of giving someone some money.

The question is not "why should you pay more tax if your dad gives you a job than if he gives you an inheritance", it's "why should you pay more tax if your dad gives you money when he dies than if he gives you money when he's alive?"

You might also, of course, ask the question "why should you pay tax if your dad gives you a job, but not if he just gives you some money".

Part of the answer, at least, has to be that a sensible taxation system should not discriminate between morally equivalent decisions that people make about their money management. In particular, families do not consist of a number of financially independant individuals. Parents pay for their children throughout childhood, and sometimes well into adulthood, whether through providing cheap or free accommodation, helping with a student's expenses, a deposit for a house, a new car or whatever. At the other end of the timescale, it is not uncommon for parents to become dependant on their children - less so from outright gifts of cash, but a number of families have granny move in with them, and she's not usually paying rent. As granny gets infirm, she is also likely to recieve very valuable personal care services free of charge from her children.

Because family members do not, on the whole, view themselves as or act as financial islands, I'm not sure it makes much sense to tax transfers of funds between family members. Why should the rules change when someone dies?

[Owen Barder]

I'm in favour of taxing bequests (and large gifts from living people) as income in the hands of the recipient.

And closing the loopholes.

[Sam]

Owen:

That starts to look consistent. Do you tax a school-leaver on the market value of the room and board his parents provide him?

[james higham]

"The big iniquity of IHT to me has always seemed to be that it introduces a tax on something which is usually untaxed unless death is involved - the act of giving someone some money."

Precisely. It is iniquitous, this tax.

[Perry de Havilland]

The estate of any half-way wealthy person with a brain pays no IHT. Not a penny. The ways to disassociate yourself with your assets are simply too numerous for the state to ever win that particular battle to appropriate the wealth of others.

I dislike the very idea of taxing the bereaved, but then I despise most of what the state does anyway so that is probably to be expected. As for how IHT incentivises people, I do not think it is should be the role of such an inherently cack handed institution (the state) to be trying to incentivise people *at all* regarding how to manage their economic affairs one way or another. The gall of an institution that prints fiat money, distorts the economy and deficit spends telling me how to run my affairs is just too preposterous.

[Brawne]

It is wrong to implement both the IHT and the NHS as there is an obvious conflict of interests.

[Stuart Theakston]

I think the big objection to IHT, should be that it's optional for the very wealthy. If you have £100m, you can 'afford' to give away assets and end up with only, say £1m in your estate when you die. If you've got £500,000 in assets, you may not be able to risk givng these assets away. This means that the impact of IHT is a bell shaped curve where the less wealth and the really wealthy don't pay it and the people in the middle do. I'd agree the solution is to bring those (very wealthy) into the tax net. Of course how you do that for a globally mobile class of people is another question. . . .

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This reminds me of the American poll that found 20% of Americans believed that tax cuts that benefitted the top 1% benefitted them. Maybe, eh?
http://www.Johnbeck.tv/tax-foreclosures.html

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