Defending Tory tax plans

Under Osborne's tax plans, you'll pay more tax if you earn £240 a week (table 1.1d of this pdf) than if you inherit £999,000. How can this be right?
I don't think it's meant to be justified - party politics is not about justice or efficiency. But, as no-one else will try and defend it, let me do so.
Start with efficiency. A cut in inheritance tax will cause altruistic parents to work and save more, as they can leave more to their children. That'll make the whole economy richer, thus giving the man on £240 a week better prospects.
By contrast, cutting taxes for him won't make much difference. People on low wages just don't have the skills to earn much more. So giving them incentives to do so is pointless. As long as they've an incentive to work rather than stay home watching Jeremy Kyle - which can be achieved by low unemployment benefits - incentives are doing as much as they can.
Efficiency requires lower marginal taxes on the rich than poor.
Next is an argument adapted from Michael Walzer's theory of complex equality. This says that goods should be distributed according to their social meaning. So, medical care should be allocated according to ill-health rather than money, honour to the meritorious, and so on.
Now, the social meaning of an inheritance is very different from the meaning of a wage income. An inheritance is an act of love between parent and child. For the state to intervene in that is a violation of the meaning of inheritance. By contrast, no such violation occurs when the state intervenes in the employer-employee relationship, because we accept that it should do so in many ways - health and safety laws, employment protection and so on. So, taxing wages is more just than taxing inheritance, in the sense that it conforms to social meanings.
Finally, there's an argument from utilitarianism. Someone with parents rich enough to leave almost £1m will grow up with high expectations, and will be bitterly disappointed if these are not met, as this guy shows. Taxing his inheritance will there impose further unhappiness.
By contrast, someone on low wages probably grew up in a poor home, and has low expectations; as long as he doesn't have to dive behind the settee when the rent man comes, he feels rich. Taxing him therefore doesn't trouble him so much. He grew up to expect nothing but a slap in the face, and is pleasantly surprised when it's only a mild one.
The state therefore increases aggregate utility by taxing the poor rather than the children of the rich, and quite possibly increases equality of welfare too.
Now, my gut feel is that all this is the purest bull. But then I know better than to trust my instincts. I suspect the arguments are intellectually flawed too. But in pointing this out, wouldn't I merely be articulating my prejudice? Or is that all that conventional politics is about?

Comments

[Matt Munro]

"Next is an argument adapted from Michael Walzer's theory of complex equality. This says that goods should be distributed according to their social meaning. So, medical care should be allocated according to ill-health rather than money, honour to the meritorious, and so on"

Isn't this Marx's "From each according to his ability, to each according to his need" in slightly less brutal language ?

[Mark Wadsworth]

That all seems fair enough, but you have touched on one of my favourite topics, the Tax Benefit Model Tables, on which I have done several posts recently, e.g. http://markwadsworth.blogspot.com/search/label/Citizens%20Income which is of far greater relevance to the little guy than whether rich people pay inheritance tax or not.

[andrew]

The Times SC-T link is a hoax! Not that that detracts from the point being made.

[Mike Woodhouse]

There's a subjective difference in experience between having tax deducted at source and having to actually pay it after receiving gross income. You don't miss what you never had, I suppose.

Having worked both as a PAYE employee and as a self-employed freelancer, I can attest that for me at least it hurts a whole lot more to have to write a cheque for money that is actually in my account.

Inheritance tax, by which I've also been sufficiently "privileged" to be affected, actually fell somewhere in between: the tax was paid out of the estate by the (pitiful excuse for) solicitors, so I didn't ever have it in my sticky little hands.

[Mark Wadsworth]

Mike W, that is an important point. Which is another plus for Council Tax/Land Value Tax. When people have to write their cheque they will ask the local council what on earth it does with the money, and why it can't get spending down a bit.

[Bruce]

Inheritance tax carries a lot of emotional baggage on both sides of the debate. I'm sure this is the inheritance tax dilemma for many of us...
It is only fair to people for being lucky enough to have rich relatives (not me!) who pass their filthy lucre on to them. But, I'll be damned if the State tries to steal the fruits of my hard labour should I wish pass them on to my children...

[reason]

Truly altruistic parents won't work and save more, they will spend more time with their kids.

[Sam]

Inheritance tax carries a lot of emotional baggage on both sides of the debate.

This is, I think, at least partly because (many) people don't see property as individual.

I have a wife and some children. We have a house - my wife and I are listed as owners, but it's my kids' house too.

I have a job, but my salary isn't "mine" - it belongs to the whole family. Now, granted, we don't let the kids make big decisions about how to spend our money, but that's because they're kids, not because it's not theirs.

When you tax the passing of property from "my" ownership to that of my children, you are taxing something that is, in a sense, already theirs, just because I happened to die.

A wealth tax has the same aggregate effect on dynastic wealth as an inheritance tax, with none of the nasty "features".

[Rob Spear]

Only a blackguard would advocate that the organization which controls the nations health care should also profit from the nations death rate.

[Bob]

I understand that you are hurting at this difficult time for you but please remember your manners.

[Derek Wicks]

The important distinction is surely that the inherited cash has in most cases already been taxed. I realise though that the aspiration of government is to tax every penny whenever it moves from one person to another.

By the way, I was reading recently that in the United States there is in fact no law imposing federal income tax, although it is a foolhardy man who tries to run this argument in a court.

[Derek Wicks]

The important distinction is surely that the inherited cash has in most cases already been taxed. I realise though that the aspiration of government is to tax every penny whenever it moves from one person to another.

By the way, I was reading recently that in the United States there is in fact no law imposing federal income tax, although it is a foolhardy man who tries to run this argument in a court.

[Blissex]

«The important distinction is surely that the inherited cash has in most cases already been taxed.»

When you hire a maid and pay her wages, she pays tax on money that has already been taxes, because you cannot deduct those wages from your income as expenses, and so on. In general the principle is that physical persons can only spend after tax money, and that gets taxes again.

Suppose that you widower father owns a #200,000 house, and decides to sell it and spend it all on 40 hookers over the years, each of them getting say #5,000 in total.The latter have earned that money and pay income tax on it.

Conversely he decides to leave the same #200,000 to you as a windfall. You haven't earned that money and you get it tax free. Because?

I think that inheritance is in effect deferred income earned by providing the service of being someone who matters to the deceased, and estates should not be taxes, but inheritors should on their portion, as income. Giving them the option to take that income either as a lump sum or in instalments.

Or at the very least inheritance is a capital gain, as it is at the very least an option payable on a specific event.

«I realise though that the aspiration of government is to tax every penny whenever it moves from one person to another.»

That's because the role of taxation is to raise revenue in a sort of cheap politically acceptable way, and taxing transfers is a convenient point,
and there are many others. Part of the art of raising revenue is to raise it from many sources at a relatively low rate per source, decreasing the incentive to cheat in each case.

Alternatively to inheritance tax, one could have taxation of wealth as such, say 1-2% per year, and then who owns it does not matter.

But then inheritance tax also has an important social role as to dampen the tendency to concentration of wealth, whether it is taxed or not, which is really rather important to many.

[Sam]

[But then inheritance tax also has an important social role as to dampen the tendency to concentration of wealth, whether it is taxed or not, which is really rather important to many.]

Why "but"?

A wealth tax is just as good as an IHT at redistributing dynastic wealth.

[Jock]

Interestingly I was speaking with a good friend last night who normally doesn't think too much about such things but had been listening to last week's "Moral Maze" on IHT. He stands to inherit a great deal more than he already has - perhaps in eight figures - but his old man is holding off a bit. He actually wondered whether a rigorous IHT regime might encourage the transmission of wealth at a stage in life when the recipient is still likely to need it more. If he waits till his father dies and he is maybe sixty years old he'll have made his money or be resigned to less anyway.

Which puts an interesting angle on what I had previously thought was a bonkers idea from the Lib Dems - to extend the gift period from seven to fourteen years. If that encouraged folk to downsize when the kids flee the nest and help them out then instead of waiting till they die maybe it would be more efficient use of their wealth.