The sporting life, & taxes

One question that was doing the rounds on Twitter over the weekend was: would you rather have a big trust fund or sporting ability that enabled you to earn similar money?

The question makes sense because a trust fund and athletic potential are both things we inherit from our parents. Both are, in Rawls’ words, “arbitrary from a moral point of view.” And both are forms of capital. One is financial capital, the other human capital. Granted, the concept of human capital does a poor job of explaining income inequalities, but it is useful to think of it when we are managing our own finances.

So, which would I prefer?

One big difference between the two is that, in sport, talent is never enough: the fact that Ravel Morrison is struggling to get into the QPR side tells us this. It takes discipline, work and dedication to parlay even the greatest raw talent into actual accomplishment.

One the one hand, this is an argument for preferring the trust fund: it saves you knackering yourself in the freezing rain every day. But on the other, it’s a case for preferring the sporting talent – because the sense of achievement when you do succeed is something the trustafarian will never enjoy. Happiness consists in what you’ve done, more than what you’ve bought.

This sense, however, is a two-edged sword. Even the most successful sporting career will contain many disappointments. In fact, the same drive for perfection that’s necessary for those achievements will guarantee dissatisfaction. Look at this interview with Sir Alex Ferguson, which came after he had won the Scottish Cup. Or look at Alexis Sanchez: he’s having a great season personally, but is reported to be unhappy. Both men embody the fact that ambition is ambiguous for happiness.

Something else, though, speaks against the sporting life. It’s what happens after it finishes. Huge numbers of successful sportsmen suffer divorce, bankruptcy and depression. And that’s not to mention an elevated chance of lifelong physical pain (pdf)*. Who wants to be a broken has-been in his late 30s?

On balance, then, it’s a tricky question of whether I’d prefer to inherit ability than money.

Which brings me to a puzzle. Anybody who’d take the money should – from one perspective** – want to tax inherited wealth more heavily than inherited ability. This is because inherited wealth is something for nothing to a greater extent than is inherited ability. What’s more, whereas the trustafarian – qua trustafarian – contributes nothing to overall welfare, the person of ability (be it sporting, intellectual or musical) gives us all something to value.

Voters, however, don’t see it this way. A recent ComRes poll (pdf) found huge support for higher top rate taxes but opposition to higher inheritance tax. How can we explain this, in light of the question I began with?

One possibility is that most people would prefer the sporting life. Welfare egalitarians would rather tax men who enjoy the deep happiness of genuine success than the man who suffers a sense of futility because of his inherited wealth. Another possibility is that voters think that most top incomes derive not from people making genuine contributions to society but from rent-seeking.

There might be other explanations. But these, I suspect, are the respectable ones.

* Though not all studies find this.  

** There are other arguments against taxing inheritances, though I find most unconvincing.

Comments

[Carol]

I hope you meant "unconvincing" in your 2nd note.

[Stephen Johnson]

** There are other arguments against taxing inheritances, though I find most convincing.

Do you mean *un*convincing? I'm guessing there's a misnegation here.

Cheers,

[james c]

As ever, Chris Dillow cannot see what is in front of his nose.

There are far more people who are likely to receive a substantial inheritance than are likely to pay top rate income tax.

So, people disapprove of taxes which they themselves might pay (on inherited houses) and are happy for others to be taxed heavily on their high incomes.

[soru]

~50% or more of the population stand to inherit more than a years salary for a League One or below footballer, 25% more than a Championship player, 5% more than a Premiership one.

The solution is probably stop doing everything year by year, and have a lifetime long inheritance/capital gains allowance.

[Mark]

I'd prefer to inherit a trust fund, because I disagree with Chris' assertion that trustafarians are less likely than top athletes to experience a sense of achievement.

Look at those who excel in a wide range of fields, from entrepreneurship to the arts to politics and you'll see a disproportionate number of people who were born into money. This good fortune gave them the freedom to pursue their dreams and provided them with a competitive advantage relative to those with similar aspirations but who also had to earn a living and support themselves.

[Lord]

I think most would say if it results in income, an income tax will capture it. An inheritance is income to the heir, but may be one they have already considered theirs. People also dislike taxes on gains; they own property, not what it is worth, only what it yields. Property is desired as a tax shelter.

[Richard]

I suspect opposition to IHT is also (understandably) emotional: people don't like the idea of being inhibited from helping or leaving gifts to their offspring.

[YMI_Alive]

It's pure conjecture to say that trustafarians are less likely to achieve notable accomplishments merely on the basis of having inherited the wealth - it just 'sounds' like it should be the case, but the basis for this argument is very flimsy - that the absence of financial struggle (which is ostensibly the driver of betterment in the athletes, per the post) implies absence of other types of drivers (be they any other type of struggle or something else, like pride, for example, or an innate need to achieve more than your parents, or something else altogether). It takes a number of important, fundamental - and unproven - assumptions to reach the conclusion that being born to wealth will invariably result in lower drive to excel and achieve.

On a separate note, the inheritance tax is, without a close second, the most stupid, unfair tax that comes to mind (coming from a lower middle-class guy who will inherit nothing). To tax property which has ostensibly already been taxed adequately during the life of its original owner again after they die? A form of legalized theft, that - no logical ground based on which this makes any sense.

All this said, in a narrow choice of sporting talent and a trust fund, I'd pick a trust fund - all other things being equal, not having prodigious talent doesn't bar me as a wealthy person from achieving moderate or even great success in sports, should I choose to apply effort to that end. It also offers me choice in the sense that I am not existentially dependent on my athletic performance - should I decide I've put my body through enough punishment, I can quit knowing my family and I won't starve... Taking talent over trust makes sense in a very, very narrow set of circumstances...

[M]

People dislike inheritance taxes because it's a double taxation. Their family already made the money and paid taxes on it, and the event of a death shouldn't result in a second layer of taxation.

A better idea would be a consumption based tax to replace all income taxes. It encourages saving money, and you don't have to worry about taxing wealth transfers because it will be taxed as it's spent. Neil Boortz's The Fair Tax is a great example, which maintains our current progressive system with a monthly payment to all citizens to cover basic living expenses.

It also makes the IRS a fraction of its current size (taxation would be regulated at the corporate level, which already has the infrastructure in place and with minimal incremental cost). The regulatory burden on the average citizen is then minimized.

[David]

@M.... up-vote
The Fair Tax... up-vote

P.S. I always have and always will dislike sport, whether for viewing or active participation. Horrible stuff.
I would give a received trust fund to any charity that worked to bring an end to all sport.

[Eminent emigrant]

Came here to state the bleedin' obvious but James c and ymi alive pipped me to the post.

[Ralph Musgrave]

Test comment. Please ignore.

[Phil]

Inheritance tax corrects the undertaxation of housing. If you buy a house for £250k, with taxed income, then sell it for £1m several years later, the £750k you make isn't taxed (if it was your sole property) This has led to huge economic imbalances, and more than half the country having a vested interest in keeping housing undertaxed, and bleating about inheritance tax being unfair as the estate has been taxed already, which is a) mostly untrue, and b) irrelevant (should we not charge VAT because the money used to buy the goods has been taxed at source?)

[chris]

@ Carol, Stephen - yes, I meant unconvincing. I changed it and added a link explaining: the "double tax" argument against IHT is especially silly, partly for a reason Phil says.
@ James c - in that ComRes poll, 49% of people oppose raising IHT. This is vastly more than the number who'll get an inheritance big enough to be taxed.
I take the point that Trustafarians might feel a sense of achievement: the self-serving bias is very powerful.

[Rich]

Phil's argument is just that capital gains in housing should be taxed, and that house prices are absurdly high (absurdly overvalued, most likely, as we may find out soon). It's not really anything to do with IHT.

[reason]

soru is on the right track.

How to do that with internationally mobile people is tricky though.

[reason]

YMI alive
"On a separate note, the inheritance tax is, without a close second, the most stupid, unfair tax that comes to mind (coming from a lower middle-class guy who will inherit nothing). To tax property which has ostensibly already been taxed adequately during the life of its original owner again after they die? A form of legalized theft, that - no logical ground based on which this makes any sense."

No this is complete nonsense.

Firstly, in general all taxes are based on transfers, and a transfer of wealth from one person to another is not inherently different that a transfer of money from one person to another. The inherent problem with taxation is the same for all.

Secondly, mostly a large part of the value of the assets so transfered has not been taxed at all, so the double taxation argument is also bunk.