For an inheritance tax

The news that David Cameron got £500,000 tax-free from his parents raises the question of how or whether inheritances should be taxed.  My view is that they should be, and heavily so.

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.

What’s more, low taxes for all – or a more equal redistribution of inheritances as the Liberal party have demanded – might do more to spread real freedom than a few big inheritances by the very rich.

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.

Comments

[Richard]

"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."

Or people object to the idea that they should be deterred from being generous to their children. It's natural to want to pass on what you have to your offspring. Hence I suspect a lot of the opposition is, understandably, emotional.

[Carol]

I have no clue if it is "natural" to want to pass on your possessions to your children, but it certainly is embedded in the culture. However, many people act as if the reason they accumulate wealth is to pass it on to their children, when in fact it is to enhance their own position and in a Veblen effect, to ostentatiously display their children as part of their position.

The meritocratic argument you keep hearing is the self-congratulation of those who manage to play the system while raking in the ideas and work of others and giving themselves kudos on how clever they are.

A true meritocracy would have everyone start out with only the basics, everyone the same, and then work their way up. No special schools, no social positioning, etc. Of course, this is intolerable to most people, since they have the ability to display their social position by sending their children to special schools and using their network to give their children a leg up in the work world (voir in the US Mitt Romney, the Bushes, the Kennedys, etc).

[gastro george]

And how much money to be inherited comes from housing, which is an untaxed capital gain?

[acarraro]

I don't quite understand the first point.

Inheritance is not a trade. In a trade you benefit by definition (since you enter the transaction willingly). Inheritance is a gift. You don't get anything back. It's like an additional VAT (on top of the VAT). It's basically saying that you are the only one that can consume your wealth and you have to pay extra tax if you want someone else to consume it.

I think charity is somewhat related. Charity transfers consumption power from one individual to another as well: should such transfer be taxed? We currently do the opposite, any consumption you shift to someone else through charity is taxed less than the consumption you use on yourself.

I am not saying this is wrong, but it's somewhat interesting that you get money to donate to strangers, but you have to pay to donate to your children. I can see how such a system might be somewhat against human nature.

At the very least it seems a possible way to get around a gift tax (establish a charity and get your own children to chair it?).

Taxing gifts seems difficult as well. Are you going to tax private school fees as a gift? What about living in a nice house, are you going to impute rent? Food? Clothes? At 12k-15k a year a private education would basically fill a large part of the allowance.

[Paddy Carter]

this by Jolyon Maugham might interest you

http://www.theguardian.com/commentisfree/2015/apr/14/everyone-hates-inheritance-tax-labour-fairer-rates

I'd be interested to know how feasible lifetime gift taxation is from an administrative perspective.

[Deviation From The Mean]

"Or people object to the idea that they should be deterred from being generous to their children."

Low inheritance tax rates favours a very small minority at the expense of everyone else, including everyone else's children! By not arguing for greater inheritance taxes you are actually putting your child at a big disadvantage when compared to the children of the rich!

So from this point of view it is strange why people put up with having their children being put at a huge disadvantage (it is almost unnatural).

This logic also applies to private schools.

If people really care about their children we should be seeing a prolonged and sustained attack on the rich anytime soon.

[Anders]

How about abolishing IHT, but taxing recipients instead?

This would encourage the wealthy to spread their bequests between a large number of recipients, which seems a good thing all round.

[theOnlySanePersonOnPlanetEarth]

"This would encourage the wealthy to spread their bequests between a large number of recipients"

Stupid and insane idea and an equally stupid assumption.

"which seems a good thing all round"

This is a case where appearances are deceptive. Seriously where do fuckwits like you live, in a castle, a tower, a boarding school dormitory, Tory HQ?

[Avraam Jack Dectis]

.
Why not abolish all forms of income tax?

A modern progressive high social service low inequality economy does not require income tax.

Given the divisiveness of income taxes, they should be dropped.
.

[theOnlySanePersonOnPlanetEarth]

"A modern progressive high social service low inequality economy does not require income tax."

Even more stupid and insane than the Anders idea! What is it about defending the wealthy that turns people into total idiots?

[Dave Timoney]

@acarraro,

"Inheritance is a gift. You don't get anything back". Not so. The anticipation of a bequest is a means of exerting control over another during your lifetime, not just through the threat to take them out of your will but through the more subtle need for them to remain in your good books. An inheritance can also entail strict obligations, so you can even exert control beyond the grave.

More generally, inheritance is key to conservative ideology in terms of guardianship and the compact of the living and the dead, a la Burke, which means it plays a role in preserving antique social relations as much as old buildings. Anthropologically, gift-giving in Western societies differs from "backward" gift economies largely in the weakness of reciprocity, which is fundamentally what we're talking about re tax-havens and IHT.

[Anders]

@theOnlySanePersonOnPlanetEarth

Actually I'm a Corbyn fan, but feel free to jump to conclusions about me if you like.

The objectionable thing about inheritance is that it allows wealth to become concentrated, increasing inequality of wealth and so also income. I find this disturbing. The most politically acceptable way to address this is to pander to the vanity of the rich by saying "sure, you have already been taxed on that hard-earned money; and no one need pay a penny of IHT, just as long as you ensure that you divide it amongst beneficiaries so that no one receives more than £50k".

This forces the rich to make friends, befriend cousins etc, find charitable causes and so on; an alternative to the default mode where wealth is transferred to the next generation of the nuclear family.

It seems you want a very high IHT rate as well as a very low IHT-free allowance. Good luck with that.

[Churm Rincewind]

theOnlySanePersonOnPlanetEarth: I'm not sure why you should object so strongly to Anders' suggestion of abolishing IHT on estates but taxing the recipients instead.

This strikes me as a rather good idea, constrained only by the practical difficulties of implementation.

For a full exegesis of this point I suggest you consult the Mirrlees report (link helpfully provided in Mr Dillow's original post), which I believe summarises the issues admirably.

[B.P.]

When discussing this issue in Canada, Jon Kesselman argued that because Canada (like the U.K.) applies its taxes on the basis of residence it would encourage some seniors to move outside the country indefinitely. "So a Canadian inheritance tax could drive many wealthy seniors abroad -- depriving our treasury not only of taxes on their estates but also their income, sales, and property taxes. The biggest losers from the loss of this wealth and the associated economic activity would be workers with limited skills; hardly a way to enhance social justice."

Here is a link to his 2004 commentary: http://www.theglobeandmail.com/opinion/lets-drive-a-stake-through-laytons-death-tax/article744058/

[SimonF]

I think IHT is a red herring. The real problem is that the middle class now expect the State to look after their elderly and infirm parents whilst they sit back and wait to inherit the house and other valuables.

Now that children no longer have an obligation to look after their parents they shouldn't expect to benefit beyond what's left after care and other expenses of being old. If you're lucky enough to have a long life then your assets should pay for it, and that includes selling the house, especially if they were built up tax free.

[aragon]

Paul Mason addressed this here it is again:

http://www.theguardian.com/world/2016/apr/11/smash-uk-mafia-elite-treat-offshore-wealth-terrorist-finance-perugia

As you can see it links into offshore transactions and the maintenance of elite dynasties. More in a similar vein:

https://boingboing.net/2016/04/11/its-the-criminal-economy-st.html

"It’s no accident that the large global corporations have been steadily jettisoning their workforces since financial deregulation began in earnest in the 1980s. While the problem of unemployment is often laid at the feet of factory robots and their algorithmic bosses, the truth is that big companies don’t need a big workforce to build profits from investments. They can just as easily (or more easily) profit from stashing money, preferably cash, in various tax havens, instead of investing them in productive activities."

https://www.theguardian.com/technology/2016/apr/03/super-rich-discover-hidden-risks-instagram-yachts-jets

"Andrew Beckett, managing director of cybersecurity and investigations at Kroll, said the firm uncovered multimillion-pound hidden assets in a divorce case last year by monitoring the location of the children’s social media posts. The court ordered the husband to give his wife $30m, but he claimed not to have such assets."

http://www.newyorker.com/tech/elements/the-oligopoly-problem

"Exploitation of concentrated private power is not a problem that will ever go away. In the United States, it has been a concern since the framing: the original Tea Party was actually a protest against a state-sponsored tea monopoly. The challenge is that power constantly mutates and assumes new forms. That’s why, whether overseeing private or public power, it’s important not to become fixated on form, but to attend to the realities that face consumers and citizens."

[Phil]

My daughter has arguments about this with rich kids at her school. They go like this:
"My parents worked hard for that money!"
"Yes, but you didn't."
And repeat.

As far as providing for your kids through inheritance goes, I'm sceptical. I know a guy who had a massive windfall thanks to an insurance policy on his father, who'd died young. He (the son) collected when he turned 18. Unfortunately he didn't have any big plans for the money, or a very long time horizon, and so he proceeded to spend, spend, spend - or rather (he was a good-hearted lad) lend, lend, lend, to his friends, who promptly spent it. And that was the end of that.

[Matt Moore]

Even those who are unlikely ever to pay inheritance tax consistently oppose it, something the Left has been equally consistently unable to comprehend.

The question is, are gifts to family counted as their income? I think no I don't care if the gift was made the day before someone died or at the instant of their death.

It seems that otherwise one would have to start taxing Christmas presents too.

[Luis Enrique]

Matt,

Well yes but any sensible gift taxation schedule would have exemption thresholds and be progressive so unless that Christmas gift is a Ferrari it wouldn't get taxed.

You're right though, I'm a leftie and find widespread opposition to IHT incomprehensible

[Towerbridge]

What about Jo Fidgen's suggestion here:

http://www.bbc.co.uk/programmes/b070d28w

In this analysis podcast she examines inheritance and why it causes strong feelings and as ever she does it really well.

I have to say I recommend her analysis podcasts, because she asks very good questions which challenge our assumptions.

[SeanV]

Best of all is a consumption tax. Inheritances aren't taxed until income is drawn-down from them. They would be held in some kind of ISA/Pension type account. Then you can tax the drawdown as progressively as you wish.`

[Deviation From The Mean]

Opposition to inheritance tax is not only unfathomable it is also an example of where parents actively seek to give their kids a disadvantage. So it breaks all the rules of evolution as well!

Such is the power of ruling class ideology!

The only problem with Paul Mason's reasoning is that money cannot create money forever. So while the rich can rely on growing their fortunes through, well, downright thievery, ultimately the whole thing will blow up into a crisis and at that point the ruling class will claim that the crisis was caused by reckless government spending on things like hospitals or the disabled!

I think the rich and their pathetic right wing mouthpieces are running out of time and space and their arguments get more and more desperate. A man from the Adam Smith Institute's argument for tax havens was that everyone would do it given the chance! As if this passes for argument!

The left need to keep this at the forefront of political discourse, well, until the revolution!