October 09, 2007

A Grope from the Grave

Matt Sinclair wants us to abolish inheritance tax- at least that is how I read this article. Inheritance tax is let us be clear a tax which only functions above a certain freshhold, it is notable that as the Conservative Lord Sheikh made clear the numbers of people affected by the tax has declined over the last seventy years:

In 1938-39, 153,000 estates were subject to inheritance tax. By 1968-69, that figure had almost halved to 81,000. By 2006-07 it has declined to 35,000 estates, though I accept that in recent years there has been some rise as a result of the house price boom. This is not a tax that is becoming increasingly onerous; it is one that is affecting fewer and fewer people over the long term. We heard in the debate last week that the Treasury predicts that it will continue to be the case that 94 per cent of estates do not pay inheritance tax.


Its worth remembering that the numbers of people actually paying this tax has fallen and according to the Treasury will continue to fall. This is not an onerous tax stopping inheritance (it doesn't do that anyway as it only takes 40% of money inherited above the freshhold) it is a tax which redistributes from the very wealthy to the less well off.

Taxing the inheritance of the wealthy is vital. Ultimately if you do not tax this, you end up with the groping hands of the wealthy in previous generations pushing their decendents upwards as opposed to anyone else's descendents. You perpetuate an aristocracy. That afterall was the reason that inheritance tax was rightly introduced- to enable people at the bottom of the pile to rise to the top. Large capital transfers can ultimately allow people to leapfrog others- using that capital to invest in setting up companies where others don't have a similar opportunity. It perpetuates an aristocracy of property. Matt's eloquent defence of the value of parental love misses the fact that what he is really defending is the perpetuation of oligarchy and aristocracy.

Lets go further. One of the justifications of capitalism is that it isn't aristocratic- despite accusations from its detractors- capitalism does enable the poorest in the land to rise to become the richest through their own talents and hard work. Well inheritance tax is a classic means which enables that to happen, because it reduces (though it does not eliminate) the advantage that the wealthy have in the game of life. In a time when inequality is rising and social mobility falling, is it really right that we abolish one of the taxes which actually helps social mobility and creates equality.

Perhaps Matt thinks it is- and he thinks it is because he 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. He might- but it would be imprudent to do so if we are going to continue to fund services for the poor as well as the rich. Inheritance tax helps the government financially very little, but it does reduce inequality and gives a more level playing field between the children of the rich and those of the poor.

Nobody is talking about abolishing inheritance and there are ways that the tax might be better structured. Reform is possible. But abolition is totally unjustified. It would help in the creation of an aristocracy of privilege and yes it would make the poor strangers in the lands of their fathers- handicapped by the fact that they unlike the rich were not granted assets gratis by their parents. Ultimately Matt's argument is an argument for privilege, and George Osbourne's announcement at the Conservative Party Conference suggests that the Conservatives are a party of class interest alone and not for the national interest.

In 1909, making a speech on the Liberal budget Winston Churchill, then Home Secretary told his audience that'unless property is associated in the minds of the great mass of the people with ideas of justice and of reason' respect for it might fall. Churchill argued that

The best way to make private property secure and respected is to bring the processes by which it is gained into harmony with the general interests of the public. When and where property is associated with the idea of reward for services rendered, with the idea of recompense for high gifts and special aptitudes displayed or for faithful labour done, then property will be honoured. When it is associated with processes which are beneficial, or which at the worst are not actually injurious to the commonwealth, then property will be unmolested; but when it is associated with ideas of wrong and of unfairness, with processes of restriction and monopoly, and other forms of injury to the community, then I think that you will find that property will be assailed and will be endangered.


The future Conservative Prime Minister was clear, property should be associated with 'services rendered', 'recompense for high gifts and special aptitudes or faithful labour done' and not be 'injurious' to the commonwealth. By all these tests massive inheritances fail- they do not reward labour, they are injurious to the commonwealth by perpetuating inequality from generation unto generation.

Inheritance tax may have bad externalities- and reforming it is a possibility to make it less bureacratic and close loopholes- but its principle is right. It is one of the few taxes that doesn't tax hard work, but taxes privilege and unearned income. Rightly it exists, rightly it should continue to exist. Benificence from parents to children is a good but it produces a bad externality- increased inequality- and it is the duty of the commonwealth to reduce that as far as it can. We should not make the children of the poor more disadvantaged than they are already by abolishing this tax, we should not make them strangers in the lands of their fathers merely because of the incapacity of their ancestors to earn money.

It should not be for us to cement aristocracy, it should be for us to allow talent to prosper and thrive. Inheritance tax should stay!

24 comments:

Vino S said...

A good post, Henry. As Churchill pointed out, in his younger, more Liberal days, property will be unpopular if it does not serve the public good.

Inheritance breaks the link between work and earnings and, to my mind, helps the development of an aristocracy as you point out.

Anonymous said...

"Its worth remembering that the numbers of people actually paying this tax has fallen and according to the Treasury will continue to fall"

If it's fallen that would seem to imply that the rich have got much better at avoiding it. Every time there's a radio discussion on this a financial adviser pops up to say that for the very rich such taxes are essentially voluntary. I would imagine they were more patriotic in the 30s as well - and of course even were they not, they have many options now which simply weren't available then.

Ashok said...

Is what defines an aristocracy really capital alone? Marx thought that, and certainly it seems the handing down of land from generation to generation kept equality of opportunity for all at bay.

I'm appealing to you as a historian - is the story really as simple as "whenever someone has a lot of money and can hand it to someone else, they're an aristocrat?"

All I want to do is get a conversation going where all the attributes that defined aristocrats previous are put forth, then attributes that might define "aristocrats" today (Tocqueville seems to imply that what would characterize aristocracy in a democratic age is qualitatively different from what characterized his own nobility), and then compare.

Edd said...

Here, here Henry. A fine defense of an unbelievably misunderstood tax.

However much people with estates above the £300,000 threshold may complain they still get £300,000 tax free. On an estate of £400,000 only £40,000 is paid in tax.A mere 10%.

Also people forget:
1. Downsizing. Elderly people sell their houses and move to smaller ones.
2. Elderly people use up their capital during their retirement.
3. Any gifts you make more than 7 years before you death are IHT free. So give your house and all your wealth to your children when you are 60 if you are so worried about their inheritance.
4. Double taxation:
a) VAT is double taxation as we buy things with net income.
b) We tax transactions and trasfers and not money per se. Income is a transaction between and employer and an employee therefore it's taxed. The purchase of a t-shirt a transaction therefore it's taxed. Likewise the passing of capital from one generation to another so it is taxed too.
5. Housing wealth is often not earnt. It is pure luck if you happened to buy a house right before the housing boom.
6. As life expectancies get older people will use more of their assets as income in life so less people will be liable for IHT.

Anyway there is plenty more to say but I will save you from it!

Lord Nazh© said...

"it is a tax which redistributes from the very wealthy to the less well off"

Welcome to socialism 101. Nice to see there are people that believe that what you earn is more deserved by others than your family.

Vino S said...

Hmmm...Lord Nazh...Churchill a socialist, i think not ;)

I think a lot of people (especially in the US) really misunderstand what socialism is. It is the opposite of capitalism - i.e. common ownership of the means of production, distribution and exchange.

Taxes are a completely separate issue (a socialist society might actually have quite low taxes, especially if nationalised industries turn huge profits). A society with high and progressive taxation but with most business in private hands is a social-democratic not a socialist one.

Matthew Sinclair said...

Gracchi,

I'm rather tired and busy at the moment but will respond soon enough.

Matt

Lord Nazh© said...

Vino: i wasn't referring to the tax itself as socialism, but the idea behind it.

The 'redistribution' of those that have to those that 'need' by any means.

Inheritance is a way for you to insure that your family has what you give them. That is what most people would want to do with their money [that I know]. But according to supporters of these taxes, your money's only job is to benefit those that did nothing to contribute to its earning, nor are related to the one who actually did earn the money.

Vino S said...

Lord Nazh, this is clearly a debate for another day, but just a couple of points:

1. You are assuming the market distribution of income is just. I don't. I don't see an economy where workers performing important services get less than £6/hr and one where lawyers helping rich people sue each other getting £1000+/hr as inherently just. And, i don't think, that viewed form behind a Rawlsian 'veil of ignorance'(where people don't know what position they'd be in a hypothetical society) people would approve of such socio-economic arrangements.

2. Inheritance reduces social mobility. If you think social mobility is a good thing, then you should be concerned if inheritance reduces this. That is, after all, the problem with an aristocracy.

3. You still missed my main point. _Socialism_ is about planning and managing the economy [i.e. whether the state or the private sector than do it better], i.e. its about ownership not redistribution. Social democracy is about the state taxing people to try and ensure that the equality we have at the ballot box is matched with a greater degree of economic equality.

Jock Coats said...

Churchill himself was quite clear:

"Socialism is against capital; liberalism against monopoly".

I disagree slightly with your interpretation of the passage you quote too. The main thrust of the 1909 budget, unimplemented thanks to the House of Lords aristocratic influences, was land tax. The main form of property, as Churchill made clear in several speeches on the budget as he toured the country defending it, that takes its value from "unfairness, with processes of restriction and monopoly, and other forms of injury to the community" is land. Whether you tax other assets or not at death, taking the family house with its value increase caused by the "restriction and monopoly" of its particular location out of the tax is quite the opposite of what was intended by Estate duty, at least by 1909.

But in the main, on the declining roll of estates paying duty, you are quite right - in 1857 death duties were liable on estates valued at just £20 (only around £1200 on an RPI inflation measure today).

Lord Nazh© said...

Vino you use 'market-distribution' to confer no responsibility on PEOPLE for anything. It's all up to the market and its unfairness.

As long as it's the market/society/etc's fault, people will not, nor will they need to better themselves

Vino S said...

Lord Nazh, I find your two arguments somewhat contradictory. In your most recent post, you are trying to blame the poor for their poverty and saying the state should not intervene via progressive taxation in the income distribution. However, earlier on, you were criticising inheritance tax. Now, although you might want to blame the poor for the poverty if they failed to take advantage of opportunities to get better-paid jobs etc., it is clear that they are not to blame for the fact that, by sheer chance, they didn't have rich parents.

This is why inheritance strikes at the very heart of meritocracy, which is why I am so surprised that so many on the Right support this cascading of inequalities down the generations. if you, and a lot of the Right do, want to say 'It doesn't matter that the poor are poor, its their own fault' then this contradicts the support for inheritance since it is clearly not their fault if they didn't have rich parents who could bequeath them stuff.

Additionally, I do find the idea that everyone can 'pull themselves up by their bootstraps' rather strange. After all, every society will need people to do menial jobs. As a left-winger, I think the state should ensure that they and their families get a decent income [via trade union negotiated pay deals, minimum wages, child benefits and other forms of social security]. I find it funny that, in a situation where jobs like rubbish collection, cleaning, child-minding etc have to be done, right-wingers ignore the fact that it is inevitable that in any society people will be doing these dirty, difficult and undesirable jobs and, instead, seek to blame the poor for their poverty.

Gracchi said...

I think there are a couple of points here worth responding too.

I have been rather broad- Ashok you are right in attacking my over exuberent definition of aristocracy- I wouldn't define the word in those terms but I would say that abolishing inheritance tax entrenches privilege- as money does have a relatonship to power.

There is more to be said about the tax obviously than just defending the principle.

Other posts I think have been answered in the debate.

Lord Higham-Johnson said...

IHT is an abomination. It's a tax on the hard work and years of paying out mortgages and for what - for the government to take it away in a greedy last grab on the suffering citizen.

It has zero to do with wealthy or poor. It is having the right to freely pass onto your offspring the fruits of your life. That's all.

Only the leftie brings in the question of wealthy when it is really a question of life and death.

This is the fundamental difference between left and right. The right's greed is to work to accumulate as much as possible, given ability and opportunity.

The left's greed is to plan to distribute to themselves, by legislation, that to which they have no moral right.

Anonymous said...

"IHT is an abomination. It's a tax on the hard work and years of paying out mortgages and for what"

Like almost any other tax, no?

Ashok said...

I did respond to your comment on the President of Iran/Columbia post - I think that was a really good point you raised about "What if some good comes out of this," and that's a difficult issue. I mainly wanted to keep the "free speech" stuff out of the debate.

I have a suspicion that "aristocracy" might be able to be defined nearly wholly independent of wealth. I don't know, I'm asking you: if we went back in time, and asked a Frenchman at the time of the Hundred Years' War "is your regime the same as England's" they would say "no, my lord is nobler than any they have," maybe. I'm not sure about this, but it might be argued that what aristocracy does is emphasize "our own" - the particular - over a universal politics. One thinks one understands the best in the world through a literal representation of the best, that being nobility. (What I'm arguing is clearer in Plutarch and Herodotus regarding Persia. Whether it is historical fact would be very interesting).

If that's the case, and it can be empirically shown that abolition of the inheritance tax makes the market work better, then Matt Sinclair might be exactly right. We don't represent "our own" as the "best" in society - in fact, we aim for inclusiveness at the expense of the best. We aim low, not high. And that's wonderful, except that it means we conflate our all-too-private desires with universal "rights" and ignore a common good a people can have.

An inheritance tax emphasizes not the common good, but a common fear: "omg he might have more than me and always have more than me aaaaaaaaaa." That's not a healthy conception of equality or nobility - someone having more is automatically wrong, even if they give more and do more? An inheritance tax only looks like it aims at the common good.

The thing is, the common good in our society is freedom. Freedom involves the right to property. The only argument for the inheritance tax is that equality of opportunity may decrease if people are allowed to inherit massive estates (the "motivated to work" arguments I can't stand - they typically mean that genuine intellectual life is nothing but socialism or welfare).

If Matt can show empirically that equality of opportunity won't be hampered by the abolition of the inheritance tax, then a lack of an inheritance tax is the default position for any democracy that has embraced capitalism.

Ashok said...

Oh, I should clarify one thing: I think much of the redistribution of wealth needed to keep order and a certain degree of equality can be done through regular taxation.

Jock Coats said...

"It is having the right to freely pass onto your offspring the fruits of your life."

Land values are the fruits of others' lives.

Vino S said...

A further point that occurs to me, is that a great deal of the reason why homes in the UK are worth more on average than homes in other developed countries are because of our planning laws. As such, given that the state has kept house prices high for the benefit of those who are lucky enough to have bought property a long time ago, it is right that it should claim taxes on that property when it is passed on.

Phil A said...

Re: ”Nice to see there are people that believe that what you earn is more deserved by others than your family”

Not always necessarily a good thing. Not if they request a donation at the ATM late in the evening when you are on your own. Not if they feel that they need your mobile phone more than you when you have just left the tube station.

There are more people who think that way than the police can manage to catch.

edmund said...

on a few tangents of this debate

The socialist tangent I think is a debate about definitions. Lord Nash is using one Vilno another-both are perfectly legitimate

a) Lord Nash is taking it to be the belief that property rights are collective- ie people have no presumptive right to do what they want with their property -even if its privatley held.

b) Vilno is taking it to be collective outright ownership so most hopsitals are "socialist" in the UK but most univeristies would not be.

I persoaly prefer lord Nash's which I think fits in better with the orignis of the word, modern nature of "socialist parties" like labour or the Social Democratic ones and contemporary debates but Lord Nash is right- Gracchis postioin is socialist and so is Vilno it's not as he understands the term- becasue the govt will not take management of the physicla assets.

ON Churchill

a) He support iht creation is his youger days -before the Russian revolution made him move away from the logic of such thoughts in justified horror.

b) I'm sure Sinclair would be happy to go back to the tax burden of 1912- massivle ylower than today - that's not a practical option.

edmund said...

I also found the contemporary comments odd ( reproduced below). How does this follow from the rest of the argument? Osborne is merely raising it to a million- and a much higher % of hte population are now millinoiares- the curren rate would actually strike quite a high % of the population if they died tmw. How is raising the threshold Left (not received) to a million going to lead to an aristocracy" it's an almost boring updating so it only effects the genuinely rich , remmber all this stuff about how it'll continue to not affect many people are in large part based on the idea the level will be raised!

George Osbourne's announcement at the Conservative Party Conference suggests that the Conservatives are a party of class interest alone and not for the national interest.

edmund said...

why tax gifs of inheritece and not gifts in general? Why is giving something so bad that it should be punished?

And not tax things that do a great deal more to promote inequalty and the recipent has not "worked" for-like natural beuaty and intelligence?

Lord Nazh© said...

Vino: My 2 arguments are not contradictory because they talk about different things.

Poor people on general can and have the opportunities to become not poor people. Some do, some don't. They usually never get out of the hole if the government is simply giving them someone else's money.

The IHT is simply taking YOUR money and deciding where to GIVE it to. You don't get to choose, the government does; for 'society's benefit'.

Since you believe in IHT, do you currently give part of your earnings to strangers? Those less fortunate than you?

and its Lord Nazh (with a z) to the other guy :)