Friday, October 12, 2007

More on Inheritance Tax

There have been an absolute storm of responses to my article on Inheritance Tax both in the comments and over at Gracchi's blog. I'll bring a range of the arguments together here. If I've misrepresented any of them I'm sure their authors will correct me. In order to keep this post from reaching book length I've had to boil a few arguments down.

"It doesn't affect that many people"

Gracchi quotes the "only 6% pay" statistic that far too many supporters of inheritance tax put far too much faith in. How can we reconcile that with the Scottish Widow's estimate earlier this year that 37% of households are wealthy enough to be eligible to pay Inheritance.

It's partly a result of rising house prices and the Treasury counting the number of estates rather than the number of households (not very sensible when you're trying to work out how many people are affected). The important question, though, is: which 6%? For an answer look to Lord Lipsey in the Guardian who, in a piece attacking the Inheritance Tax, acknowledged that it is paid only by the "unwise or the unlucky". This isn't, as Lipsey tries to argue in the article, because of unfair exceptions. If exempting businesses and farms is unfair then a fair Inheritance Tax is one that bankrupts countless family businesses.

It will always be relatively easy to avoid Inheritance Tax if you know what you're doing and if death doesn't take you by surprise. The rich are more likely to have expensive advice to avoid the tax both because they are more likely to be able to afford it and their large inheritance tax bill is more likely to justify the cost of lawyers and accoutants that make an effective avoidance strategy possible.

Inheritance Tax may only affect 6% of people but they are not necessarily those most able to pay and, for the small amount of revenue it raises, it causes too many of those 6% too much distress as well as having broader social effects.

"You only want to cut Inheritance Tax to look after the class interests of the middle class" and "if you were in the Rawlsian Original Position you wouldn't want to cut Inheritance Tax"

Look at the results of a major YouGov poll commissioned by the TaxPayers' Alliance (I don't think the full breakdowns are online - I'll try and put them up tomorrow). Particularly reliable thanks to a large, 2162 strong, sample. 65% of the total sample think that the Inheritance Tax is unfair. In the North - where much fewer homes qualify for Inheritance Tax than in the South and London - that number falls to 64%. In both cases the number who think the tax is fair is 10%. There's almost no difference in opinion on Inheritance tax at all between groups with very different chances of having to pay it.

If you want to move off a regional measure look at the socio-economic breakdown. Among the C2DE group 63% think the tax is unfair against only 9% who think it is fair. This is not a tax that people only oppose because they think they are likely to have to pay it. By the Rawlsian logic Northerners and the poor should be even more supportive of Inheritance Tax than someone in the Original Position; they are less likely to have to pay Inheritance Tax than an average Briton.

There is no evidence that opposition to the Inheritance Tax is based upon class interest or selfishness. Can the Left please drop this tired ad hominem?

The results of the TPA poll are backed up by the massive increase in support for the Conservatives following the announcement of their proposal for inheritance tax cuts. If only the very rich 6% pay this tax and people only support it because they are selfish then why, exactly, was a Conservative proposal to abolish the tax so popular among at least some of the other 94%?

"The Inheritance Tax strengthens social mobility by breaking up concentrations of wealth"

This argument really troubles me. To make it you have to have simplified the concept of social mobility so much that it simply becomes "how often do people change status". That is clearly not always a good. If a company director becomes a chronic alcoholic, loses everything and winds up in the gutter there has been a social movement. Is the human suffering somewhat offset by the increase in 'social mobility'?

Apart from petty vindictiveness I can see no reason to support downward social mobility. Instead I support making it possible for people from poor backgrounds to improve their lot in life: Upwards social mobility.

Upwards social mobility is on the decline but the Inheritance Tax doesn't help. To create the conditions for the poor to create a better life for themselves you need to do all you can to encourage good schools, strong families and economic opportunity. The economic opportunity is there, the schools need reform more than money and you don't create the conditions for a resurgence of strong families by placing a particular penalty in the tax system on an expression of the intergenerational bond.

"Without Inheritance Tax you'll get an aristocracy"

I can see two potential problems with aristocracy:

1) They monopolise political power by being the only ones with votes.

2) They create barriers to entry that prevent others getting wealthy.

Neither of these problems seem particularly relevant today. The abolition of Inheritance Tax wouldn't be followed by a restriction of the franchise. Barriers to upward mobility are created by failures of public services and social decline rather than some kind of social stigma against the climber among the business community.

If aristocrats are just people with inherited wealth then I fail to see the problem. Unless you believe in the socialist dogma, proved wrong long ago, that a nation's prosperity is a fixed pie, and the wealth of one is the poverty of another, dynastic wealth shouldn't be a worry.

"Instead of cutting Inheritance Tax you should go for a tax cut everyone will benefit from"

As the Inheritance Tax doesn't raise a lot of money it makes little difference to the possibility of other tax cuts compared to whether or not you control government spending and tackle government waste (academics at the European Central Bank estimate we waste 16% of government revenue by spending less efficiently than more astute nations). If you do have to prioritise, though, I think you need to consider efficiency in a broad sense: which tax raises the least revenue for the amount of social and economic disruption it causes?

If such an index were constructed I think Inheritance Tax would be near the top of the list. While it doesn't affect everyone those it does affect suffer enough that it is not at all worth the paltry amount the exchequer receives. VAT and Income Tax make a lot of people a little worse off and raise enough that you can only make very marginal changes for the money that gets rid of Inheritance Tax. Inheritance Tax affects a smaller group of people directly but it often causes a huge amount of heartache and disruption for them. It also sends political signals that hurt the willingness to save and family values that we should all want to protect.

"The reason is that Leonard must have some incentive to do what he is doing, or he wouldn't be doing it. He wants to give his life meaning when none seems possible, so he continues on his revenge mission, and as well he wants the satisfaction of avenging his wife."

He won't take satisfaction from avenging his wife. He won't remember, won't have the slightest inkling that she has been avenged. That tragedy is central to the story.

He definitely does take meaning from his struggle to avenge his wife just like I'm sure many parents take meaning from knowing that they are going to provide for their children once they are gone. Parents will place quite a value on the estate that gives them such meaning. Taxing inheritance therefore taxes their interests and is a tax on the dead who earned their wealth rather than on the children who inherit it unless you want to argue that income tax is a tax on unearned wealth if the income would otherwise be spent providing for children.

The same TPA poll I quoted earlier also confirms that the elderly are deeply opposed to the Inheritance Tax. 67% of the old think this tax is unfair (11% think it is fair). Apparently they do care what happens after they die.

"[Matt] thinks that it is wrong to tax a virtue- well again I think he is wrong- hard work is a virtue and income tax takes 40% of people's income above a freshhold and more people are taxed via income tax than inheritance tax, would Matt abolish income [tax?]"

This is a ludicrous Reductio ad Absurdum. I think that taxing virtue is a bad thing. As such I think that both taxing hard work and taxing leaving money to your children is a bad thing. However, I am willing to sacrifice that principle at times in order to fund essential services. I accept Income Tax as it appears to make an important contribution to funding services which I think is worth the sacrifice of taxing a virtue. By contrast, Inheritance Tax makes very little contribution to funding services so is not worth the sacrifice of discouraging good behaviour (saving and looking after your children).

8 comments:

wm8c said...

"Taxing inheritance therefore taxes their interests and is a tax on the dead who earned their wealth rather than on the children"

Seems to me that this is just another way to suck money out of the taxpayers. An inheritance left to the children has already seen a full tax burden as you mention as "income tax" and it doesn't seem right that it should be able to be taxed again as inheritance tax? Seems to be double dipping to me unless the inheritance came from a 401K or similar nox taxable fund before the deceased didn't make it to the proper age to wihtdraw it. Just my two cents worth.

Gracchi said...

Matt on the social mobility point- how can you have upward social mobility without downward social mobility. Do you only have an absolute definition of poverty.

You don't seem to deal with the question that taxes may be more unfair- ie VAT- but less obvious as well because of the way that people pay them. Inheritance tax is obvious because you pay it in one chunk- VAT isn't. I can tell you how much inheritance tax I paid or didn't pay after the death of my father, I couldn't begin to tell you how much VAT I payed this year.

Last point I agree with you about enforcement, that is a huge issue and one which needs dealing with. But just because a tax is difficult to enforce, doesn't mean the principle behind it is wrong.

Matthew Sinclair said...

Gracchi,

That upwards mobility requires downwards mobility makes sense in fixed-pie economics or taxonomical terms. It is pretty silly when you think about it in terms of actual people though.

I just need to think of my father's family - all of whom moved up socially. They grew up relatively poor but all of them managed to either climb the corporate ladder with great success, start their own business or get into a middle class profession like teaching. They all moved upward socially.

Do you seriously think that required some aristocrat to fall from grace? Of course not. There aren't a fixed number of 'spots' for any particular socio-economic station. The number changes with economic development and the middle class has grown massively in recent decades. In fact, plenty of people - in moving up - help others to move up too. Entrepreneurs do this most obviously by bringing others with them.

This doesn't really have much to do with an absolute vs. relative measure of poverty but yes - an absolute measure of poverty is definitely more sensible even if the basket of goods used to define poverty might need to change over time. I set out why here.

On fairness, I wasn't using the opinion polls to make that case. I was using them to make two points:

1) Opposition to the Inheritance Tax is not based on selfishness.

2) People do care about Inheritance Tax their children will have to pay.

As such, I don't think you've really undermined my case at all. I made my case that IHT should be prioritised on other grounds. If opposition to IHT is based on ignorance about other taxes it is still not based upon selfishness.

Vino S said...

Matt, you say upward mobility does not require downward mobility, which means you are using an absolute definition. But, if so, why do you write in your article social mobility 'is declining'. Measured in absolute terms, it can't be declining, since most people are having year-on-year increases in their incomes. As such, you are eliding absolute and relative definitions of mobility - that is misleading.

Regarding whether opposition to inheritance tax is based on selfishness I am not really sure whether that is the main point or not. I think it is. You think it isn't. There is no way to find out which is correct and which is not since we can't go into the minds of the beneficiaries of the tax cut and find out what they think.

Anyway, I think the double-taxation point made by wm8c does, as Henry points out, reflect the fact that people are unaware of how much they are paying in VAT and other indirect taxes. That is how the Tories got away with doubling VAT in 1979-80 and yet didn't get much political fall-out!

As I have said before, anyone serious about inequality would reduce the regressive taxes first - not one of the most progressive taxes we have. Additionally, the British tax system - while taxing income and spending - hardly taxes capital at all. This is a big loophole and helps those who are already rich at the expense of ordinary people and of those who have only just started getting large salaries. Capital taxes are v. low - the CGT rate will now be 18% (which will be a rise from 10% in some cases and a fall from 40% in others). In addition, to there being a small and easily evaded capital gains tax, capital is not really taxed in any other way than IHT. To remove IHT would thus be to give capital a previleged status. Other countries have a wealth tax. At the very least, any loss in revenue from IHT should be made up by introducing such a tax.

Matthew Sinclair said...

Vino,

Yourself and Gracchi are chronically confusing the absolute poverty vs. relative poverty and social mobility debates. Social mobility, in the useful sense, is the ability of people to move from one socio-economic group to another. That is in decline. I would like to make it easier for people to move up. However, I see no function in making people move down whatsoever. Relative and absolute measures are a complete red-herring as the example I've given shows. The ability of people to do what my father's family did is in decline. What they did in no way required others to be socially downwards-mobile.

On selfishness. People who aren't likely to be the beneficiaries of Inheritance Tax are still opposed to it. There is no strong correlation between the percentage of people in a region or socio-economic group who will pay IHT and the numbers who oppose it. As such, the selfishness point must be rubbish.

Pointing out that VAT is a second tax is a clever response to the double-taxation point but actually quite insubstantial. Inheritance Tax is an additional tax that people pay on spending money on their children purely due to the misfortune of dying.

On equality. Do you really think that the best way of helping equality is to break the finances of a certain portion of unwise or unlucky middle class families each year? I think if equality has changed from being a concern for the poor (I've described why it isn't going to help their upwards mobility) to a desire to kick those who've done well then I see no reason to pursue it with any seriousness.

Vino S said...

Matt, you are the one confusing absolute and relative measures. I always talk in relative terms. Social mobility is nearly always measured by the chance of a child born to a family in a certain income quintile moving to another. That is a relative measure.

On the post on my own blog I pointed out that other taxes are also unpopular and that a more useful qn would instead be to ask people whether they would be willing to see other taxes rise to fund an IHT cut.

You say that mentioning VAT as double-taxation is a 'clever' point. Its clever because it is true!

You refer to 'breaking' the finances of middle-class families. No ones finances will be 'broken' by gaining £350k in tax-free capital gain via inheritance and getting 60% of the remainder. This emotive language may sway floating voters but it is misleading - and I am concerned with rational argument not with propaganda.

And, if you are against IHT per se, rather than just in favour of raising the threshold, by far the biggest gainers will be the rich not the 'middle-classes'. I assume that you favour scrapping the tax entirely, not just raising the threshold as both Mr Darling and Mr Osborn have proposed (correct me if i'm wrong). It a a great rhetorical tactic (for those opposed to IHT per se) to ignore the issue of the size of the nil-rate band [the key issue for most people] and instead to talk about the tax per se [which is mainly paid by the wealthiest people in society].

Matthew Sinclair said...

Vino,

You don't seem to have actually addressed any of my arguments.

Your points about the amounts of tax taken being small miss the point. They may sometimes be small in terms of the size of the estate but many people have small incomes relative to their wealth. With illiquid assets that can cause substantial trouble paying.

Phil A said...

Excellent Post!