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August 17, 2007

Scrapping Inheritance Tax

Behold the power of the blog! Two weeks after I propose that inheritance tax should be abolished in order to increase social mobility (the so called "bonking for virginity" argument) the Tories come out with a proposal to do exactly that!

Slightly more seriously, there's going to be a huge outbreak of indignation on the left. How dare anyone let the plutocrats pass on their unfair privileges down the generations? Well, quite. Only, there's one major problem with this argument. The rich don't actually pay inheritance tax. There's so many things exempt from it (farmland, AIM stocks, family businesses, a huge array of trusts) that anyone with a serious sum of money doesn't actually pay it, or at least not in any great amount. It's those in the 1x to 3 x the tax free limit that do in fact pay it: a tax supposedly designed to hit the very rich actually gets at the petit bourgouis (and yes, given house prices in the South, I think it fair to call someone with £1 million in assets petit bourgeois).

Even better is somethng I haven't seen in the papers (as yet) but is on the ASI site. Lifetime Savings Accounts. However it's dressed up this is a move to something highly desireable: consumption, not income, taxation. What you stick into your savings gets tax relief: this is the same as saying that you only pay tax on your consumption, not your income. As long as the tax is then collected when you take money out of that savings account (on the same basis as any other income in that year) then we've got there. Consumption taxation.

While this isn't currently being proposed, perhaps someone should: add to this system BOGOF. For the low paid, buy one get one free. Those below some level of income (or assets) for each pound they put into such an account they get another one deposited there by the Govt.

The aim, of course, is to make everyone a property owner, everyone petit bourgeois. If you like, the abolition of the working class, those who rely solely upon the product of their labour for their income.

August 17, 2007 in Taxes | Permalink


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Those below some level of income (or assets) for each pound they put into such an account they get another one deposited there by the Govt.

I appreciate the intent behind this BOGOF scheme, but I worry about the implementation. A hard cutoff point for those above the level? Or a gradual reduction? Income from all sources (inc. benefits)? Lots of rules, no doubt changing every year. This would require more means testing, more form filling, more call centre of staff to help people fill in their forms, more processing of information by the government, more complexity - all things the government is not good at.

Posted by: Ed | Aug 17, 2007 10:56:30 AM

"working class, those who rely solely upon the product of their labour for their income": didn't the Welfare State largely abolish that?

Posted by: dearieme | Aug 17, 2007 10:59:43 AM

It's impossible for everyone to be a rentier, unless it's from abroad, and in which case we need to be running a current account surplus.

The inheritance tax proposal is ridiculous - the Conservatives say it is because of house prices, which just underlines how the gains are basically windfall and due to restrictive planning laws.

Far better to use the money to cut income tax, and perhaps I could suggest that the people who it seems are desperately waiting for their parents to die and angry that they'll get £420,000 not £500,000 go and do something productive and earn a living.

Posted by: Matthew | Aug 17, 2007 11:05:25 AM

Tim, most of your argument is correct but I would point out that trusts have lost some of their inheritance tax breaks, since the 2006 Budget. Brown has made tax planning a very difficult job these days.

That said, IHT is a bad tax, distorts economic behaviour and is intrinsicly unfair, playing on envy of success and wealth. If I want to bequeath my money to whoever I want, it is none of the State's damn business.

Posted by: Johnathan Pearce | Aug 17, 2007 11:18:03 AM

"If I want to bequeath my money to whoever I want, it is none of the State's damn business."

But of course if that's your attitude then you can't be favour of any taxes. If I want to sell a widge to someone then it is none of the state's business. And so on. It's not an argument against inheritance tax, particularly if the tax as reformed so it is explicitly a tax on the recipient, rather than the giver's estate.

Posted by: Matthew | Aug 17, 2007 11:20:50 AM

Oh, here we go again with "consumption tax".

In a service economy, production = consumption.

You can't encourage production by discouraging consumption.

Posted by: Mark Wadsworth | Aug 17, 2007 11:23:45 AM

Errrr, no, Matthew. When my parents die, I will have to sell the house I grew up in and want to raise my children in because without that I will be unable to afford the tax bill that accompanies their death. Alternatively, I could take out a mortgage on the house and continue paying (with interest) for the house that they already own. Rather than having people feel like they are helping their family get somewhere, inheritance tax creates the sense of being on a treadmill: never quite owning what you've bought, never quite having finished buying it.

Inheritance tax is morally worthless but then the dead giveaway is the arbitrary cut-off point. It represents double taxation (though no different from other crap taxes like VAT there). Consider also that it only looks at the size of the estate not the number of those it is willed to. It is about the state claiming ownership of the departed's property, not the state seeking to redistribute wealth more equitably.

Posted by: Philip Thomas | Aug 17, 2007 11:24:03 AM

P.S. Sorry for sounding hostile, I just get worked up about this because it is close to home, literally and figuratively.

Posted by: Philip Thomas | Aug 17, 2007 11:30:55 AM

Didn't detect any hostility. Income tax has an arbitrary cut-off point, too, last time I looked, but I don't think that's a dead giveaway that it is morally worthless.

All taxes have an opportunity cost - because you want to pay no taxes when you inherit a house worth more than £300,000, I have to pay higher taxes on my income. Unless the Conservatives are going to scrap all taxes, they need to make choices, and I think there are a hundred better taxes to cut.

As I said though, I think the tax should be reformed so it explicitly on the person who gains.

Posted by: Matthew | Aug 17, 2007 11:54:16 AM

Don't think by my criticism of inheritance tax that I am defending other taxes. I think the whole system is nuts. It's centuries of aristocratic repression and supposedly short-term fund-driving for old wars that through inertia has spilled over into our relatively democratic, peaceful times. Time to clean shop and the cut-off lines in income tax would be high on the list to end up in the skip outside.

Posted by: Philip Thomas | Aug 17, 2007 12:01:50 PM

Agreed with Matthew here. Why should £150k that I'm given for being lucky enough to have rich parents and skilful enough to not make them hate me, be treated any differently from £150k that I'm given for being lucky enough to get a decent job and skilful enough to not be fired from it?

Posted by: john b | Aug 17, 2007 2:54:33 PM

Here in Canada there is no inheritance tax as such. Which seems odd considering our generally high levels of taxation! There is a deemed sale of capital assets ,so capital gains taxes may fall due. (maximum rate about 25%) However the primary residence is exempt from that.

The other place there can be a substantial tax burden upon death is on assets sheltered in Registered Retirement Savings plans. All the deferred income tax falls due.

Occasionally someone advocates an inheritance tax. The standard arguments against it seem to be twofold. It did not raise a lot of money when we had one, and it amounts to double taxation. An inheritance tax is really a wealth tax in disguise, but I suppose there are lots of people out there who don't have problem with that.

The really odd break we get here is that hobby income is not taxed. So if I win $15,000,000 in the lottery, I get to keep it all.

Tim adds: That last is common: gambling winnings are tax free....but you can't offset the losses. Amognst the Common Law countries I think only the US is different on this.

Posted by: Bill | Aug 18, 2007 2:42:46 AM