A bad argument for scrapping IHT

Ianayat Bunglawala repeats a really bad argument for abolishing inheritance tax:

In recent years more and more families have begun to get caught up in the inheritance tax net as the rise in house prices has far outstripped the increase in the inheritance tax threshold...The upshot of all this is that inheritance tax is becoming an increasingly immoral tax that is penalising hard working families.

But this is contradictory. Insofar as people are paying inheritance tax because house prices have risen, they are doing so not because they've worked hard, but because they've benefited from favourable monetary conditions and planning restrictions that limit housing supply. Why shouldn't people pay a tax on something they've done nothing to earn?
I agree we should stop penalizing hard working families. But the way to do this is to cut tax on hard work - that is, income tax. And cutting inheritance tax actually prevents this; the £3bn spent on cutting IHT  is £3bn not available to finance cuts in income tax. Now that's immoral; I for one would much rather pay tax when I'm dead that when I'm alive.
This is not to deny that there might (only might) be arguments for scrapping IHT; I'm attracted by Tim's argument that it'll increase heroin abuse by rich kids. And it's theoretically possible - though I know of little empirical evidence - that inheritance tax deters business formation and hard work, as providing for one's children is a major motive for both.
Rising house prices, however, are no argument for scrapping IHT. And the fact that the Redwood report seems to cite this as the only reason to do so (p81) shows just how weak IHT's opponents are.

Comments

[Mr Eugenides]

The point I'd make is that IHT was introduced and presented as a tax on assets passed down from one generation of extremely wealthy people to another. Because the thresholds have been allowed to lag behind increases in house values etc., you don't have to be extremely wealthy any more to pay it.

That doesn't per se make it immoral. But in my view the onus should be on those who support a tax to justify it, and the justification that it only hits the very well-off is growing weaker all the time.

[jameshigham]

..Why shouldn't people pay a tax on something they've done nothing to earn?..

Meaning, conversely, that if they have done something to earn it, they needn't pay?

Either way, I am against this principle of inheritance tax - why should the state take from someone who's produced an asset from his own work and wants to pass it on to family?

[john b]

"why should the state take from someone who's produced an asset from his own work and wants to pass it on to family?"

Alternatively, why should the state take from my income generated from my own work that I want to spend on beer?

But assuming we're past the adolescent rage of 'but it's not FAIR that I have to pay tax', why not tax all income at the same rate irrespective of source?

That way, if I want to give away my £1m estate to 20 poor relatives, they'll each be taxed as if they earned £50k (average rate of c30%); if I want to spoil my son then he'll have to pay higher-rate on the whole £1m.

It also gets past the trust funds problem that currently dogs IHT - income received from the trust fund would be taxed just as if it were earned...

[Russ]

I hate tax but of them all IHT is one of the better.

It can be one factor in stopping an aristocracy of wealth forming, that is so long as the truly wealthy actually pay it of course.

Children of richer families get enough advantages in good education and better nurture as it is. If you want to give you kids a better life then buy them a nice education rather than worrying about leaving them plenty of dosh that they might squander. This way you'll find out if they have any talent rather than just spoiling them.

[Matt Munro]

I don't know why anyones worried, the rate that life expectancy is growing, by the time our parents fall off their perches we will all be so demented with altzheimers we won't have the faintest bloody idea what taxes we are supposed to be paying.

[Sam]

I find it bizarre that we tax gifts from dead people, but not gifts from living people.

[Roger Thornhill]

IHT has crept downwards. The more people are affected and feel so unjustly, the more will seek to avoid it.

Best way is to tax all income at the same rate, but should IHT be included for family members? If the inheritors spend it, then why complain? I am certain they can spend it far better than the State ever could - at least they would tend to spend most of it on expensive products and so tend to reward excellence and quality (recognising that "expensive" and "quality" do not always go together...). Think of all the livings made from pandering to the rich, and all that tax revenue collected from such activity.

Land Value Tax might do alot to erode the holdings if they are held, but I would wish that IHT could be deferred until the inheritors choose to liquidate the assets, not force people to divvy up while they are still trying to arrange a funeral. To do what the government does now is a bit like taxing the capital gain in shares before they have been sold.

Note to Gordon: Don't you DARE.

[sanbikinoraion]

What John Band said. As usual.

[Blissex]

«Rising house prices, however, are no argument for scrapping IHT. And the fact that the Redwood report seems to cite this as the only reason to do so (p81) shows just how weak IHT's opponents are.»

Conversely, it shows how strong they are, politically. Because the thinnest excuses are used when there is a huge demand for an action.

Politics currently is hugely influenced by two factors:

* A lot of old folks living off capital want wages kept down the value of capital going up, deriving income from more rent.

* A lot of potential inheritors want the capital value of their inheritance to grow and not be liquidated over time.

As the number of middle class people with capital they own or they expect to inherit grows, their votes become important.

«I agree we should stop penalizing hard working families. But the way to do this is to cut tax on hard work - that is, income tax. And cutting inheritance tax actually prevents this; the £3bn spent on cutting IHT is £3bn not available to finance cuts in income tax.»

But you have got it backwards -- the real goal *is* to penalize hard working families, that is those of the poor and immigrants. The general political scene is that the percentage of capital rich rentiers among native voters is rising. All these middle class people just want to live off the hard work of the poor and poor immigrants by inheriting lots of capital, and just getting rent from it. That is what the code for ''hard working'' means.

The political goal is precisely to lower taxes in rentiers, and increase income and especially sales taxes to compensate, to pay for the comfortable retirement of middle class rentiers at the expense of a minority of nonvoters or non capital owners.

70% of british families are now home owners, the percentage of business and share owners has increased vastly too since 1983, and the percentage of voters is even higher.

I personally know several middle class people in the 30s and 40s who stand secure knowing that they will inherit a few flats and houses from their parents and grandparents, and they will enjoy a very comfortable early retirement if only they get their capital free of charge and the burden of taxation falls mostly on the underclass (sales tax), the working class and immigrants (income tax).

The future that many british middle class people in their 30s or 40s expect is to say inherit a couple of shops staffed entirely by easily bossed and sacked immigrants, live in nice inherited cottage in the countryside, come to town every week to collect the takings, and vote for lower capital taxes and for more income taxes to pay for free NHS and free retirement homes for themselves.

«Now that's immoral; I for one would much rather pay tax when I'm dead that when I'm alive.»

But as everybody knows inheritance tax is paid by the inheritor. It is in effect a tax on a capital gain or an income windfall, which is taxed for political reasons (see above) at a much lower rate than that paid by earners, and at the same rate independent of the size of the windfall.

[Blissex]

«increase income and especially sales taxes to compensate»

Oops I really meant *employment* taxes, not «income» taxes. The idea is to leave older rentiers income relatively light taxed, and have immigrants and the working class pay for the pensions and the health services used by those older rentiers.

[Phil Beesley]

This is my first time looking at the comments on "Stumbling and Mumbling". Be gentle to me.

Discussion about death duties (I decline to use the euphemism, IHT) always ends up with gut response. "Kill the rich" or "I've paid already". But do death duties discourage wealth creation? Do death duties affect "class change" or "social improvement"? And where is the public debate about death duties?

Rosemary Righter (what a great surname) writes in The Times today in favour of lower duties. She argues that tax has already been paid on legacies. But perhaps not. Few people get seriously rich by ignoring tax evasion (and possibly avoidance) tricks. Maybe, death duties are a way of collecting that avoidance
money after death.

Tim Wosrtall, amongst many, writes that the very rich will dodge death duties using evasion schemes. Well change it then. Hold your nose, employ accountants who know the loopholes.

[ortega]

Inmoral ? That's indeed an adolescent argument here. Do we want rich people to pay taxes for any economical or political reason or just because they are rich and they deserve it?
There is nothing wrong in not liking to pay taxes. The point is for the State to justify each of them by explaining goals and consequences. So, I need a good reason to accept why all the other people will take one part of my parents house when they pass it unto me.

[spencer]

The good reason for the government to tax away part of the value of the house you inherit is so I will pay a lower income tax rate.

[Bob B]

IHT should be abolished or the exemption threshold raised substantially on equity grounds.

IHT disproportinately affects Londoners because of London house prices and because for many families, their house is easily their biggest financial asset. We also already know London resident taxpayers are major net contributors to the national exchequer:

"London is a major net contributor to the Exchequer: Our estimates suggest that London continues to be a substantial net contributor to UK public finances, by between £6 and £18 billion in 2003-04, despite the deterioration in public finances at a national level, with the mid-point of the range of estimates implying a net contribution of £12.1 billion."
Oxford Economic Forecasting: London's Place in the UK Economy 2005-6
http://www.oef.com/On-Line%20Services/ClientsTriallists/LPUK05FULL.pdf

Simply put, IHT is effectively an additional tax burden on Londoners - and other SE residents. This is so extra grants can be paid to Scotland to fund additional public spending per head there, notably on healthcare and policing since:

"In Scotland, the alcohol-related death rates for males and females were around double the rates for the UK as a whole in 2002-2004, according to new analysis published today by the Office for National Statistics in Health Statistics Quarterly 33 (Spring 2007)."
http://www.statistics.gov.uk/pdfdir/alrate0207.pdf

"A UNITED Nations report has labelled Scotland the most violent country in the developed world, with people three times more likely to be assaulted than in America. England and Wales recorded the second highest number of violent assaults while Northern Ireland recorded the fewest."
http://www.timesonline.co.uk/article/0,,2-1786945,00.html
http://news.bbc.co.uk/1/hi/scotland/4257966.stm

Instances of racist violence in Scotland:
http://news.bbc.co.uk/1/hi/scotland/north_east/5139054.stm
http://news.bbc.co.uk/1/hi/scotland/glasgow_and_west/6161100.stm
http://news.bbc.co.uk/1/hi/scotland/south_of_scotland/5094262.stm

[pommygranate]

Chris

IHT is simply unfair because it represents a tax on money already taxed. the argument about 'unearned' money is not relevant because if this is your main gripe then you should favour introduction of CGT on primary residences.

[Mark Wadsworth]

What Roger says.

IHT and ALL other property-related taxes (Council Tax, Stamp Duty Land Tax, capital gains tax) should be scrapped outright and replaced with a fiscally neutral land value tax on the unimproved site value of very privately-owned plot of land.

[Bob B]

"replaced with a fiscally neutral land value tax on the unimproved site value of very privately-owned plot of land."

And just who is to decide how much the unimproved site value is worth and how?

[Blissex]

"IHT is simply unfair because it represents a tax on money already taxed."

That's an amazingly stupid or disingenuous argument: when you pay a plumber to fix your drains you use already taxed money, as the plumber has to pay tax on his income too. When you buy an iPod you pay VAT using money that has already been taxed.

Try to look at inheritance as a kind of option scheme: an option that vests on the death of the previous owner. If the estate of the previous owner has gone up, you get a fat capital gain, if it has been pissed away, you don't.

Or see it like this: someone has an estate worth £100,000. He decides to either blow it on hookers or to leave it to an inheritor. In the first case the hookers pay tax on the £100,000 they earn, because it is income, in the second the inheritor who has not moved a finger gets it tax free! Because that's his natural right, innit?

As another comment says:

"a good reason to accept why all the other people will take one part of my parents house when they pass it unto me."

the argument for the abolition of the tax is just that hookers should pay more income tax, but soon-to-be-wealthy recipients of accidental windfalls should get them tax free. They have a large block of votes, and that's how you win arguments.