July 1, 2009
The Fairness of Inheritance Tax
Inheritance tax is widely opposed. According to BBC’s Newsnight programme yesterday, some 80% of people are opposed to it.
Tapping into the public mood, the Tories say they want to raise the threshold for being eligible for inheritance tax to £1million, after which every pound inherited would be taxed at 40%. (Of course, given the dire state of the public finances, the Conservatives may find this impossible).
Yet last night on Newsnight, Tim Horton of the Fabian Society spoke up in favour of inheritance tax – with impressive success.
Appearing on the slightly silly “Politicians Pen”feature of Newsnight (think Dragon’s Den, but pitching to the former director general of the BBC, a tycoon, etc with political ideas relating to how to deal with the public finance crisis). Horton convinced the panel that the income tax threshold should be frozen at £325,000 pounds. This would mean that as inflation brings more people above the threshold, more people will be eligible for the tax, and the public finances will benefit.
Horton carried the day from a public finance perspective – but he was criticised for his “socialist attacks on the rich”. I thought this was actually unfair, as Horton did no such thing. But it’s a stock charge against defenders of inheritance tax. So the defenders of inheritance tax need a good reply.
That good reply exists, and it consists of arguing for inheritance tax because it is fair, rather than because of a desire to simply penalise the rich. But employing that reply means acknowledging the competing and justified concerns of the anti-inheritance tax proponents.
First, let’s recall the main – and it should be said, extremely plausible and powerful - objection to inheritance tax. Put roughly, it goes like this: people work hard, in part, because they want to build better lives not just for themselves, but for their children. Having a pot of wealth to pass on to one’s children is part of the reason people go out to work, which most people don’t particularly enjoy in the first place. Furthermore, it brings parents a measure of security to know that they will leave their children something, and satisfaction that they are helping their children even when they have passed away. The parent-child bond may be strengthened in important ways as a result. This is good for parents and children.
Let me say that I believe these things are true. But they are not the end of the story.
For when parents leave their children money and/or property, that has repercussions beyond the familial relationship. The bequeathing of wealth, property, money etc creates imbalances in society. It results in some people – those who had rich parents – having more than others. In this world, having more property, wealth and money means (generally) having an easier, better, less stressful and more pleasurable life. That, after all, is why people usually want money, property and wealth.
However (as Tim Horton explained on Newsnight) at present in the UK the top 50% of people own 93% of the wealth, and the bottom 50% own just 7%. That’s some serious inequality.
So point number one: allowing unmitigated inheritance tax can only reinforce this inequality. After all, if the top 50% already have 97% of the wealth, and they can pass it on to their children when they die, then the top 50% will easily continue to keep the top 97% of the wealth.
That, however, is only an objection to inheritance tax if you think equality is important. Lots of people don’t. So we turn to fairness, which the Fabian Society has noted people outside of the left tend to be more interested in.
It is a simple, uncontroversial fact that nobody deserves to be born to their parents. I no more deserved to be born to my middle-class, financially prudent and well-employed parents than Joe Bloggs deserved to be born to a single mother on a sink estate. That’s because birth is a lottery – nobody is responsible for who their parents were.
So the brute fact is, nobody deserves to inherit money from their parents. Why? Because it is a fact of arbitrary chance that somebody was born to parents able to leave them large sums of money, rather than financially imprudent parents leaving nothing but debts.
The fact that my parents worked hard for their money is an explanation for why they should keep it (minus the necessary deductions to the social collective necessary for the upkeep and existence of the society which allows them to work and prosper, namely “tax”). It is not an explanation for why I should get it when they die. I did nothing to earn that money, and I did not “deserve” to be born my parents’ child. I therefore do not “deserve” to inherit their money, wealth or property.
Because I do not deserve that money, wealth or property (having done nothing for it) and because that money, wealth or property stands to make my life go considerably better than that of somebody not so fortunate in the lottery of birth, it is unfair for me to inherit these things. I did nothing for them – so why should I get them?
But that’s not the end of the matter, for there is more to politics and the settling of social distributive questions than just the issue of who deserves what and whether or not distributions are fair. Here we must remember that the anti-inheritance tax proponents have a strong case when they say that leaving an inheritance behind is important to the lives of parents and children; it provides peace of mind, strengthens familial bonds, provides a reason for the general unpleasantness of remunerated work, etc. It is true that these things matter.
The point is that we shouldn’t be trying to play a zero-sum game. The state should be able to simultaneously acknowledge two things.
First: nobody deserves to inherit wealth, property or money – their inheriting these things makes their lives go better than those who were not so lucky in the lottery of birth.
Second: it is important to the lives of people in a free society – both parents and children – that parents be able to leave an inheritance to their children.
These two things need to be traded-off against each other. The state can correct for the first by taxing inheritance. This adjusts for the unfair reward of material distributions allocated by the lottery of birth, and can be used to compensate those who were unlucky enough to be born to parents who couldn’t or didn’t leave them an inheritance. This is fair because receiving inheritance and the accruing benefits is itself fundamentally unfair.
However, the state must recognise that leaving inheritance is important to peoples’ lives. Thus the state must certainly not impose a 100% inheritance tax: people must be allowed to leave something to their children, if their lives are going to go well.
The real question is therefore where to draw the line between these two competing demands. How much unfair, undeserved social and material inequality are we prepared to allow in the name of allowing people’s lives to go well by leaving inheritances for their children?
Personally, I think the threshold is currently too high. £325,000 is an awful lot to receive tax-free because you were lucky enough to be born to wealthy parents – no matter how hard those parents themselves may have worked. I think that this creates considerable and undeserved material and social inequalities, which cannot be justified.
Others will disagree, and will think the threshold should be higher still.
That’s fine. We can disagree about that. The point is, the debate should be a disagreement about where to draw the line between compensating for unfair material distributions, and allowing people to participate in an activity which makes their lives go better. It should not be one side clamouring for no inheritance tax, and the other demanding a 100% rate. Both those approaches play a zero sum game, and that’s not a game we should be playing.
Quirky Indian said,
July 1, 2009 at 1:27 pm
Very interesting and balanced argument. I never looked at it in that way and I must admit you have a compelling argument. I agree with the principle, and as you say, it is only the rate that needs to be decided.
Indulge me for a moment while I take your ‘accident of birth’ argument to a ridiculous extreme, extending it to insurance. Surely a person who has inherited a disease is not responsible for it. So is it fair to pay a much higher premium, or, in most cases, to not have access to insurance at all, based on a simple accident of birth? And in that case, do healthy offspring have a moral and social obligation to be taxed for their inherited immunity and good health (or more specifically, the absence of inherited disease), so as to defray the insurance costs of the genetically unlucky? The same argument could be applied to medical/health care costs.
Like I said, a ridiculous extreme. But it does throw up some interesting questions, doesn’t it?
Cheers,
Quirky Indian
Paul said,
July 1, 2009 at 2:38 pm
Quirky Indian,
It’s not actually that extreme an example – and it does throw up some interesting questions.
You may be interested to learn that philosopher Ronald Dworkin wrote at length about precisely these sorts of questions. Noteably, he did so in his Equality of What? Articles Part 1 and 2. These are very dense pieces of literature, but they kick-started the modern academic debate on equality.
Anyway:
” Surely a person who has inherited a disease is not responsible for it.”
Correct.
“So is it fair to pay a much higher premium, or, in most cases, to not have access to insurance at all, based on a simple accident of birth?”
Presumably not.
“And in that case, do healthy offspring have a moral and social obligation to be taxed for their inherited immunity and good health (or more specifically, the absence of inherited disease), so as to defray the insurance costs of the genetically unlucky?”
1. I wouldn’t parse it in terms of “moral and social obligation”, necessarily. I might prefer to phrase it in terms of “is society justified in imposing taxation upon the healthy in order to compensate the unhealthy”?
2. To which I would answer: “I think so” and “don’t we already do this in developed countries? Most people suffering from a life-long illness do not bear the full cost of their illness, the state provides an awful lot via healthcare provision – and that is good and right and as it should be”
“The same argument could be applied to medical/health care costs.”
Indeed it could.
And again, I’m not sure these thoughts are either ridiculous or extreme.
Dan said,
July 1, 2009 at 11:28 pm
I realize you think I’m evil and probably won’t respond to this, but I thought it was worth writing this anyway:
Your point “First: nobody deserves to inherit wealth, property or money – their inheriting these things makes their lives go better than those who were not so lucky in the lottery of birth” is true, but I honestly don’t see how it gets you where you want to go. Yes, it may be the case that Smith does not deserve the wealth that his parents earned during their lifetime, that is certainly plausible enough. But how does the beneficiary of the tax you’re proposing to levy deserve the money any more? The whole argument seems to imply that you’re offering us a new distribution in which luck is taken out of the equation altogether. But in fact what an inheritance tax offers us is not such a distribution, but rather a new one which is saturated with luck to the same extent, and is also more equal. So the whole illusion of offering a luck-free distribution is just that, an illusion, and the argument turns into one about whether or not equality is morally important.
I think you should also be upfront (if you are indeed taking the Rawlsian line about things) and admit that you don’t think anybody deserves any wealth whatsoever, not just if it is inherited but also if they created it ex nihilo with their bare hands out of their own blood sweat and toil.
Quirky Indian said,
July 2, 2009 at 9:50 am
Paul,
Thank you for the heads up on Dworkin. I shall try and see if I can get hold of any of his works.
{To which I would answer: “I think so” and “don’t we already do this in developed countries? Most people suffering from a life-long illness do not bear the full cost of their illness, the state provides an awful lot via healthcare provision – and that is good and right and as it should be”}
Ah, but that’s not quite the correct example. The problem here is that there is no specific tax on the ‘healthy’; rather, the entire tax-paying population shares in the burden of state-provided health care. My question was, should there be some sort of tax – new or additional – imposed only on the healthy and those free from inherited disease?
Cheers,
Quirky Indian
http://quirkyindian.wordpress.com
Paul said,
July 2, 2009 at 10:36 am
Dan,
I don’t think you are evil. If you read my original reply on that thread, I explicitly said that I don’t think you are evil, but that the philosophy you ascribe to is. I said that I believe you have the best of intentions.
I’ll add, however, that you do have a propensity to subtly misread what other people write. I can’t decide whether you do this on purpose or not.
Anyway, your points:
“Yes, it may be the case that Smith does not deserve the wealth that his parents earned during their lifetime, that is certainly plausible enough. But how does the beneficiary of the tax you’re proposing to levy deserve the money any more? The whole argument seems to imply that you’re offering us a new distribution in which luck is taken out of the equation altogether.”
I don’t think it does imply this. The distribution I am advocating moves to reduce the impacts of luck on people’s lives. By taxing inheritance, we can partially correct for the arbitrary chance which leads to some people being born with rich parents and standing to have much better lives than those born to poor parents. This doesn’t claim to take luck out of the equation altogether, at all. In fact, it keeps luck squarely at the heart of the matter – but rather than letting luck rein free, it seeks to address its impacts.
“But in fact what an inheritance tax offers us is not such a distribution, but rather a new one which is saturated with luck to the same extent, and is also more equal. So the whole illusion of offering a luck-free distribution is just that, an illusion, and the argument turns into one about whether or not equality is morally important.”
I suppose technically you are right to say that the new distribution is “saturated with luck to the same extent”. Certainly, we could say that the same amount of luck is involved. What is different, however, is that my advocated distribution attempts to correct for the impacts of luck, whereas having no inheritance tax does not attempt to correct. That’s the important delineating point, not the simple fact of luck being in the equation.
So you are unjustified to say that the entire thing is an “illusion”, merely attempting to masquarade on behalf of concealing equality. There’s evidently more to it than that.
Not least because the attempt to correct for luck is about *fairness* – and fairness is not the same thing as equality. After all, a distribution may be fair precisely because it is *not* equal: if I work harder than you for a set of examinations and perform correspondingly better, it would be unfair if we received the same grade classification. Equality is not fairness. And please not, I took steps to distinguish fairness from equality in the original piece – fair enough you think that was a charade, but I honestly don’t think it is/was.
My argument is about fairness: is it fair for some people to have manifestly and considerably better lives than others, because they were arbitrarily born to rich parents not poor? I don’t think it is. I think we should correct for that.
Why do I think we should correct for that? Because it offends my moral sensibilities that some people’s lives go so much better than others, for the brute fact that they got lucky in the lottery of birth. It upsets me, offends me, makes me feel sad, angry and disgusted. Why? Because I empathise with my fellow human beings, and to see their lives go so much worse due to brute luck pains me.
These are ethical responses to a social distribution problem. You may not have those ethical responses – indeed I’m certain with that. If you’re happy with that, then fine. But I will fight tooth and claw to make sure you never order the world, because I believe that it is deeply, deeply wrong to be indifferent to the poverty, suffering and paucity of life quality of others *especially* when those things are due to arbitrary bad luck. To pretend you are not indifferent to these things by saying you are about “rights” and “freedom” (as Libertarians do) is gauling: it adds insult to injury.
Paul said,
July 2, 2009 at 10:41 am
“Ah, but that’s not quite the correct example. The problem here is that there is no specific tax on the ‘healthy’; rather, the entire tax-paying population shares in the burden of state-provided health care. My question was, should there be some sort of tax – new or additional – imposed only on the healthy and those free from inherited disease?”
Hmm, I see your point.
I guess the question comes down to how far we want to go.
I expect there are other competing concerns in the area: for example, to what extent can ordinary people be persuaded to give up their income/wealth to benefit the poor, without giving up that income/wealth becoming a strenuous burden upon them.
Which would take us back to the trade-off position: how much tax to help the inherited disease people versus what the non-inherited disease people can reasonably be expected to shoulder.
From there on you get into tricky questions about social attitudes, ability and willingness to collect/administer tax, etc.
In principle I think I’d say that yes, the disabled should receive direct subsidy from the able-bodied – but where to set that level is a very complex question I can’t hope to answer now.
The Fairness of Inheritance Tax | called2account said,
July 2, 2009 at 3:00 pm
[...] The Fairness of Inheritance Tax « Bad Conscience. [...]
Saul said,
July 2, 2009 at 3:16 pm
Paul,
I found this blog post via Professor Beale’s blog, ataxingmatter.
Personally, I vacillate between extremes, and I think you are making a valiant effort to represent both sides fairly. I do think, though, that your representation of the conservative argument is a bit two dimensional, which I think throws off the balance of your argument.
To illustrate: Imagine someone from a low income family who puts himself through school, hustles work, and builds a successful business. Forty years later, he’s got a wife, children, considerable wealth, part of which is invested in the business, which incidentally (or not so incidentally) employs a few people. As with many closely held businesses, his children work at his business.
Now, this person, retired at age 75 comes to you for some financial planning. You advise him that he can leave 325,000 (roughly $500,000) per child, with the rest of his estate going to the government.
I’m not arguing whether or not this corrects for luck’s unfairness. Presumably, though, because your proposed policy is focused on the unfairness of inheritance, you would eliminate any and all methods of transferring more wealth. But you can’t underestimate the socially responsible incentives built in to a system that allows one generation’s wealth to get transferred to the next.
The question for people slightly less responsible than you: what do I do with this money? My children won’t get the business and they won’t get more than $500,000. How many ways can I blow $25 million in 10 years? The business gets cashed out and the money gets wasted in a million ways that only indirectly help the general public. In fact, this guy wouldn’t wait till he was 75 years old to cash out. The treasury might pick up some incidental tax revenue from all that spending, but it isn’t getting $24 million.
On the other hand, allowing him to transfer a substantial portion of his wealth to his children would likely leave the business intact, would leave other investments where they are, and in general would have him spend more responsibly. Imposing a 50% estate tax would leave the children rich (unfairly) and grumbling about how much tax they have to pay, but more importantly, would result in $12.5 million for the treasury with future tax revenues from the wealth that was transferred. Granted people waste wealth, but for the most part they also have a lifestyle to maintain indefinitely.
The argument is not new, and it’s not very compelling when we’re talking about the difference between a tax rate of 45% vs 55%, with other methods for transferring wealth (at least in the US). But your policy is like handing someone money to spend, with the condition that any unspent money has to be returned. They’ll either waste it or never earn it in the first place. Is it fair that the children were born into wealth? Maybe not. Is it fair that they get to stay wealthy even if they did little to build it? Maybe not. But a more beneficial distribution would be ultimately achieved, as well as a larger economic pie to distribute, if you humor the human desire to spoil undeserving children.
Paul said,
July 2, 2009 at 3:35 pm
Saul,
I’m a bit busy today (and have wasted too much time online already) but will try and respond to your points in due course.
Dan said,
July 2, 2009 at 10:24 pm
Paul,
I’ll add, however, that you do have a propensity to subtly misread what other people write. I can’t decide whether you do this on purpose or not.
I have to admit, that time it was done on purpose (albeit tongue firmly in cheek).
I don’t think it does imply this. The distribution I am advocating moves to reduce the impacts of luck on people’s lives. By taxing inheritance, we can partially correct for the arbitrary chance which leads to some people being born with rich parents and standing to have much better lives than those born to poor parents. This doesn’t claim to take luck out of the equation altogether, at all. In fact, it keeps luck squarely at the heart of the matter – but rather than letting luck rein free, it seeks to address its impacts.
But that’s just it – an inheritance tax doesn’t address the impacts of luck, what it does is address the impact of luck relative to an egalitarian baseline, but that is not the same thing. Suppose Smith’s parents die, the inheritance is taxed, and Jones is the recipient of part of the money levied by the tax. Now, you say this is justified because Smith doesn’t deserve the money that his parents earned during their lifetime – this is true. But the kicker is that Jones does not deserve the money any more than Smith does. It is just as much a matter of luck for Jones that he gets this money (he is lucky, say, to live in a state which has such an inheritance tax at all) as it would have been for Smith if he had got it all. So we are faced with choosing between two distributions both of which are going to have the same element of luck. You clearly prefer the more equal one, but my point is precisely that there are no principled grounds for preferring it on the basis of luck or desert, rather, that what appears to be the deciding factor for you is simply good old equality. You are not “correcting for luck,” you are merely replacing one form of luck that you don’t like, namely luck which leads to unequal consequences, with one that you do like.
As for fairness, it’s not so obvious to me that it’s on your side. Certainly I think there’s a case to be made that if someone creates something or some value, it’s only fair that they should be allowed to do with it as they see fit (with the usual provisos about respecting the rights of others) – after all, it’s theirs. I think most people would actually agree with me. You see the argument “inheritance tax is especially unfair, because the money has been taxed once when it’s earned and it’s not fair for it to be taxed again” very often which seems to suggest that a lot of people share something like the intuition that fairness does dictate respecting people’s legitimate property rights, even if it does mean that inequality increases.
Finally, it’s a real shame that although you say you empathise with your fellow human beings, you can’t attribute any reasonable motives to those you disagree with. I suppose you think that anyone who disagrees with you is actively in favour of poverty, suffering and paucity of life quality, but I know a lot of libertarians and funnily enough I’ve never met one who is animated by implementing these things (or even indifferent to them!). Sure, I don’t care about equality so much as absolute quality of life and respect for people’s rights, but maybe one day you might realize that state involvement in people’s lives is almost invariably destructive of these ends and come to think of my ideas as less evil. As for fighting tooth and claw – I start work at a think tank in London on Monday, so maybe we’ll have the chance to fight it out soon enough.
Peter said,
July 4, 2009 at 4:11 pm
I think I agree with Dan’s following point.
Bearing in mind I’m not a luck egalitarian, this is what I would say if I had my luck egalitarian hat on. But, I don’t think it can get them where they need to go:
Luck egalitarians hold a particular principle to be true. The principle might state something like “how much money people have should be determined solely by the free choices that they make, and not by brute luck”. Now, this principle cannot rule out distributive schemes that we’d want to reject. Suppose we have a system of taxation such that if you don’t “deserve” the money, it gets taxed off you. A system in which tax revenues are then poured downt he drain satisfies the luck egalitarian principle – it does not (on its own) necessitate redistribution. So your worry here is that taxing Able to pay Infirm is not required by the luck egalitarian principle, because Infirm doesn’t deserve the money anymore than Able does. Here I agree, the luck egalitarian principle does not entail redistribution in that way. But, couldn’t we conjoin the luck egalitarian principle with a Pareto principle to rule out caes where tax receipts are poured down the drain? (because it’s possible to make either Able or Infirm better off by giving them the tax receipts)
We then need to specify a value system that we employ when we optimise (the system must be pareto optimal with respect to something). But, if we’re to privilege Infirm over Able as the receiver of the tax revenue, we need an argument as to why equality is preferable. I think Harry Frankfurt’s EQUALITY AS A MORAL IDEAL shows that that’s pretty difficult to give.
I don’t agree with Dan’s thought that fairness might support libertarian distributive schemes though (though I appreciate that he was just sketching that possibility, rather than arguing for it).
Paul said,
July 4, 2009 at 4:34 pm
Saul,
“You advise him that he can leave 325,000 (roughly $500,000) per child, with the rest of his estate going to the government.”
False. A proportion of his estate over that threshold goes to the government. In the UK it’s 40%. We do not have a 100% inheritance tax. So say he wants to leave 400,000 to each child, then each child will pay 40% tax on £75,000, whilst getting the first £325,000 tax free.
“I’m not arguing whether or not this corrects for luck’s unfairness. Presumably, though, because your proposed policy is focused on the unfairness of inheritance, you would eliminate any and all methods of transferring more wealth. But you can’t underestimate the socially responsible incentives built in to a system that allows one generation’s wealth to get transferred to the next.”
Read the post again. I’m saying *exactly* these things.
Your point about a disincentive to work hard and build a business because of inheritance tax is kind of weak.
Firstly, as above, it’s NOT that the state will come in and take all the wealth above a threshold – only a percentage of it. Secondly, intead of blowing the money, why doesn’t your business owner put the money into equity in his business? If his children are part-owners of the business, when he dies they will take over the business, and won’t incur the inheritance tax they would if their father just left them the money.
Thirdly, you’ve got to remember that small, family-owned businesses are the minority case. Most inheritance will not be due from one individual having worked hard over a lifetime to forge a business – so to argue that we cant have inheritance tax because it disincentivises small business is hard to maintain, because you have to say that off the back of a minority case of disincentivisation, we can’t levy inheritance taxes on all the *other* kinds of inheritance which don’t involve small business at all.
“But a more beneficial distribution would be ultimately achieved, as well as a larger economic pie to distribute, if you humor the human desire to spoil undeserving children.”
Why? Why on earth will spoiling lazy children lead to a bigger social pie? Remember that the logic cuts both ways: if allowing peolpe to leave some inheritance incentivises them to work hard, then the knowledge that they will inherit wealth/money/property for nothing must in turn *disincentivise* those who will inherit it. So how can un-taxed inheritance therefore straightforwardly increase the social pie??
Again, for your reasoning to work, you have to make small family businesses the absolute lynch pin of economic prosperity. As they’re manifestly not in any developed economy, your point about the social pie is again difficult to maintain.
Paul said,
July 4, 2009 at 4:44 pm
Dan (and Peter),
I guess you are right: I am opting for one kind of luck over another.
And yes, ultimately, that’s because I’d rather have luck corrected for in one direction, to promote luck in another direction, in favour of equality.
Why equality? Well (and here I’m going to skip a huge amount of reasoning) I ultimately think a preference for equality is a basic moral sentiment that some people have, and others don’t. Unlike Frankfurt, I’m not going to set out and try and argue for it rationally. As a good Humean in ethics, I’m happy with just favouring equality because, ethically, that’s what matters to me. Dan disagrees. That’s understandable; as a moral projectivist I don’t believe that we must ultimately share the same moral principles.
“Finally, it’s a real shame that although you say you empathise with your fellow human beings, you can’t attribute any reasonable motives to those you disagree with. I suppose you think that anyone who disagrees with you is actively in favour of poverty, suffering and paucity of life quality, but I know a lot of libertarians and funnily enough I’ve never met one who is animated by implementing these things (or even indifferent to them!).”
No, as I said in the tax haven thread, I think people like you are hugely misguided. I think you have the best of intentions, but end up in crazy places advocating stuff that would have the exact opposite effects that you hope for. Of course, you think the exact same about me (i imagine).
“but maybe one day you might realize that state involvement in people’s lives is almost invariably destructive of these ends and come to think of my ideas as less evil.”
Maybe one day you will see that this is an incredibly crass statement, will realise that “state involvement” could mean many, many different things and be applied to many different degrees. Maybe one day you will see that the effects of the unrestrained free market upon people’s lives – and the atomism and dog-eat-dog ’society’ it will create – are far worse than balances and restrained state involvement (to advocate state involvement does not mean Stalinism, remember!). Perhaps then you will see that my belief that both the market and the state have important roles to play in people’s wellbeing is more sensible – and more conducive to the things you value – than advocating for the removal of one almost entirely.
Saul said,
July 5, 2009 at 2:22 am
Paul,
I used a family business to illustrate; my point about incentives applies to anyone doing anything to generate wealth. I thought it might show how notions of fairness depend on the situation. Fairness is rarely an abstract concept.
I assumed for the benefit of your argument that your proposal was that 325,000 goes tax free and the rest is taxed 100%. I don’t agree with it, but I can see the argument.
If you only intend to maintain the 325,000 estate tax exemption, then your whole argument about equality is poorly addressed by your proposal. Wealthy people will transfer a large proportion of wealth to their lazy undeserving kids anyway — you say 60% in the UK plus 325,000. A $500 million estate still means $300 million for heirs. Would you say that’s fair? What did they do to deserve such wealth? In terms of fairness to all the people who do not have wealthy parents, you may wish to cap allowable inheritance.
And if, as you say, the business interest is transferred because the children retain their ownership interests, how will the children get an ownership interest if not for lifetime transfers? I don’t practice law in the UK, but in the US this is one of the ways one avoids or mitigates estate tax.
So your proposal seems to be this: retain the estate tax in its current form with the current exemption, and allow tax planning. Pretty much status quo, and certainly not equal in the way I read your initial post.
Dixon of Dock Green » Blog Archive » Petru Groza said,
July 8, 2009 at 12:33 am
[...] The Fairness of Inheritance Tax « Bad Conscience [...]
antonhowes said,
July 18, 2009 at 5:52 pm
First of all, may I congratulate you on the generally high quality of debate and the thoughtfulness of your posts on this blog.
Reading through the comments, there’s a very rare but admirable willingness to engage in debate with critics and those other ideologies. Unlike many vaguely left-leaning blogs, yours does not appear to engage in straw men an ad hominem arguments, which is quite refreshing.
Your moderate stance and recognition of the need to find balance and compromise, particularly in this post, is also great.
(also, apologies for any bad typing – it’s a bad and sometimes unresponsive keyboard)
Anyway, to the point.
I understand your point about unearned income or leveling ‘luck’. I also get how we don’t really “deserve” it through birth – if I remember correctly, the whole idea of IHT was to be against the aristocracy, sometime during the Liberal administration starting in 1906.
However, progressive income taxation also arguably does the same thing against luck – instead of being levied directly on the more conspicuous transfer payments from parents to children, it assumes that those who are rich benefitted from society’s conditions, a degree of actual luck (e.g. finding a job, circumstance, etc), and various development provided or paid for by their parents in the form of nature and/or nurture. So if you went to a state school and did well, it’s repaying the state for that transfer payment, and if you went to independent school, it’s penalising you for the luck you got from your parents.
(That is the only moral basis I can think of for progressive taxation right now – being sympathetic to those poorer than yourself is admirable, but probably the place for philanthropy -forcing that somehow seems to devalue it in my mind – however I’m sure you can enlighten me somehow. A moral obligation to the poor is also weaker in that there are numerous other ways of raising the revenue – not all of which goes to the poor or unfortunate anyway – and we have to remember that even flat taxes are still taking more from the rich – just the same as a proportion – and most flat-taxers argue or a higher tax threshold anyway). Oh, just to pre-empt any subtle misunderstandings, I’m not talking about income tax itself, but progressive income tax.
So, if progressive taxation penalises the fortunate for their luck by birth and nurture, and inheritance tax does this also, wouldn’t it be better to have one or the other (within reason obviously), or a balance between the two as otherwise it’s double taxation?
…which also leads me to another point – if that’s what progressive taxation was for (e.g. predominantly against the aristocracy), then is it outdated, especially considering that IHT is a better means of getting directly at the ‘luck’ element, and that we now have a much smaller aristocracy, but a much larger number of people who pulled themselves up by their own bootstraps??? (also worth noting that the argument I outlined earlier for the morality of progressive taxation fails to take into account that the pupil has to work hard and respond to the nurture lavished upon them as well!)
antonhowes said,
July 18, 2009 at 5:58 pm
Woops – the link in my name hasn’t updated. This should be right one now.
Paul said,
July 18, 2009 at 6:21 pm
Hi Anton,
Thanks for the long response, and the kind words.
I will try and get a reply to you some time this week. I only just got back from China and I’m pretty exhausted and have a million things to sort out. Will do my best though.
Paul said,
July 20, 2009 at 4:52 pm
Anton, here goes:
“if I remember correctly, the whole idea of IHT was to be against the aristocracy, sometime during the Liberal administration starting in 1906.”
Well, that’s certainly one background idea in the history of IHT. Not sure it’s the “whole” idea though, and certainly not the whole idea today.
“However, progressive income taxation also arguably does the same thing against luck – instead of being levied directly on the more conspicuous transfer payments from parents to children, it assumes that those who are rich benefitted from society’s conditions, a degree of actual luck (e.g. finding a job, circumstance, etc), and various development provided or paid for by their parents in the form of nature and/or nurture. So if you went to a state school and did well, it’s repaying the state for that transfer payment, and if you went to independent school, it’s penalising you for the luck you got from your parents.”
Sounds about right to me.
“That is the only moral basis I can think of for progressive taxation right now – being sympathetic to those poorer than yourself is admirable, but probably the place for philanthropy -forcing that somehow seems to devalue it in my mind – however I’m sure you can enlighten me somehow.”
Try this: http://thebadconscience.com/2008/11/25/why-it-is-fair-for-the-rich-to-pay-higher-taxes/
“So, if progressive taxation penalises the fortunate for their luck by birth and nurture, and inheritance tax does this also, wouldn’t it be better to have one or the other (within reason obviously), or a balance between the two as otherwise it’s double taxation?”
1. Why is it double taxation? It’s only double taxation if you decide that it doesn’t matter *who* is being taxed. The wealth/income/property/whatever certainly gets taxed twice: once when the original person (let’s call her the mother) receives it, and once why the heir receives it (let’s call her the daughter). I guess this is “double taxation” in the sense that mother gets taxed and then daughter gets taxed. But I don’t see why this is a problem, given that it’s a different person being taxed each time. This, incidentally, takes us straight back to the issue of fairness (for i do not see how simply stating “it’s double taxation” is an effective argument against daughter having her undeserved luck compensated for).
2. What’s special about double taxation? It goes on all the time. VAT is a good example – it’s a double taxation on your income. You get taxed once when you get paid, and then you get taxed again when you spend your wages on consumer goods. What follows? If you think double taxation is bad, you need to articulate a reason *why* – and then possibly go on to say why it’s different in the case of IHT from VAT, and why that should matter (or why it doesn’t, perhaps). Simply stating “it’s double taxation” isn’t doing any intellectual work.
3. If you think double taxation is wrong in this specific instance because the effects of luck are being compensated for at the income-tax stage and therefore don’t need to be compensated for at the inheritance stage, then I disagree. Basically, this is because [as per 1. above], the *person* being taxed changes. So I still want to keep adjusting for luck. I think IHT and income tax are complimentary in this situation.
“which also leads me to another point – if that’s what progressive taxation was for (e.g. predominantly against the aristocracy), then is it outdated, especially considering that IHT is a better means of getting directly at the ‘luck’ element, and that we now have a much smaller aristocracy, but a much larger number of people who pulled themselves up by their own bootstraps??? ”
I’m not exactly sure what you are getting at here. Firstly, I’m not convinced that IHT *is* a better way of correcting for unfair luck, secondly I don’t see why we should be opting only for IHT *or* progressive income tax (why can’t we have both?).
Further, I’m not sure why you conclude that we now have a much larger number of people who pulled themselves up by their own bootstraps now. If you read over yesterday’s Observer articles about Alun Milburn and the findings about how upper-middle class families are dominating all profressions and inequality of opportunity is increasing, then the picture seems to be the exact opposite of what you are claiming.
” (also worth noting that the argument I outlined earlier for the morality of progressive taxation fails to take into account that the pupil has to work hard and respond to the nurture lavished upon them as well!)”
Not really. It can simple run like this: “yes, many people who come from privileged backgrounds work hard as well as receiving privilege. Nonetheless, their privilege is a matter of arbitrary luck, so to some extent that must be corrected for even though the person in question worked hard. However, recognising their hardwork the state will not seek to put them on a par with everyone else – i.e. advocate absolute equality. It will simply take steps to address the extremes of ineqaulity, in the name of fairness, whilst accepting that some inequality will remain.
Or perhaps, go even further a-la-John Rawls: being disposed to work hard is an arbitrary matter of luck – either inate of inculcated from parents. The fact that somebody is diposed to work hard is as much a matter of luck as their being born clever…and social inequalities that result should be corrected for accordingly.
antonhowes said,
July 20, 2009 at 8:20 pm
Ok, I had better clarify some points – I was being a bit too colloquial at the start before I started getting into it.
My point about the aristocracy was that these are people who’s income or position was almost solely derived from the “luck” element – e.g. their birth.
I get your point about the study of social mobility, but I was really comparing the current day to the time when IHT was started – I’m sure you’ll agree that even with some recent downward trends in mobility, they are still a far, far cry from the rigid (though weakening) class distinctions and immense landed wealth of the 1906-9 aristocracy.
With my point about double taxation, I was referring to taxation of the “luck” element, not necessarily the people or the goods. It strikes me as deeply unfair if those who benefitted from the luck element have the effects of the pure luck element taxed from them twice (e.g. 200% taxation of luck). In actuality this is far from the mark, and we can only speculate on how much luck was involved, but assuming ceteris paribus and the use of absolutes, my point was that the use of progressive taxation and IHT are essentially taxing the same thing (that part you certainly got), so you either need one or the other, or a balance of the two (I did mention a balance!)
I just thought it was interesting that you could easily have one or the other though, seeing as they have the same moral basis (I haven’t yet read your earlier article, but for the purposes of this point, let’s assume that’s true)
I largely agree with your penultimate paragraph – I know it will now seem that I’ve narrowed the parameters of the debate down massively, but it was only to make that point about one tax or the other (or both, but that’s boring) – I’d just never thought of IHT essentially being synonymous with progressive taxation before.
Reading your penultimate para, the only bit I take issue with is “take steps to address the extremes of inequality” – judging by the article and discussion, shouldn’t it be more like “take steps to address the unfairness inherent in “luck”"
Hmmm I see your point with Rawls, but I think it may be a bit too far – possession of the willpower is one thing, but exercising it should still be rewarded even if we have a disposition to exercise it. It’s also slightly too scary – could easily feed into an argument for the existence of Fate or the absence of free will, which I find hard to believe (even if some of the logic is appealing, there’s something instinctively ‘wrong’ about it).
Good discussion. Thanks. How was China?
Paul said,
July 20, 2009 at 10:02 pm
“so you either need one or the other, or a balance of the two (I did mention a balance!)”
OK: I’m going for a balance of the two. I think they are nicely complimentary.
“I just thought it was interesting that you could easily have one or the other though, seeing as they have the same moral basis ”
Though by the same logic, you could have both…
“I’d just never thought of IHT essentially being synonymous with progressive taxation before.”
That’s probably in part because the state of discourse on taxation in this country is pathetic; it’s dominated by one side screaming “it’s unfair to tax hardworking middle class families” and the other screaming “let’s get the rich, god I hate the rich”. The former tend to dominate, and the result is that many people are simply unaware of ideas about why we even pay tax, and why it’s fair for some people to pay more than others.
“Reading your penultimate para, the only bit I take issue with is “take steps to address the extremes of inequality” – judging by the article and discussion, shouldn’t it be more like “take steps to address the unfairness inherent in “luck””
Hmm, maybe. But read the exchange with Peter and Dan above in the comments. Dan made me admit (to myself as well as him) that what’s doing a lot of work in my thinking is equality, not just luck and fairness. I left out the intermediary steps and went straight to equality. You’re right, technicaly, that I should have stayed on fairness, but hollistically it was more intellectually honest to cut the chase and go to equality.
“Hmmm I see your point with Rawls, but I think it may be a bit too far – possession of the willpower is one thing, but exercising it should still be rewarded even if we have a disposition to exercise it. It’s also slightly too scary – could easily feed into an argument for the existence of Fate or the absence of free will, which I find hard to believe (even if some of the logic is appealing, there’s something instinctively ‘wrong’ about it).”
That’s where (I take it) the “Luck egalitarian” school of thinking comes in and has a lot to say. Try Dworkin, Cohen etc on this stuff, if you’re interested in the academic debates under-pinning my thoughts in the area.
“How was China?”
Terrifying.
Jonas said,
August 23, 2009 at 12:15 pm
Talking about the luck in someone’s life (especially the luck of inheriting some money or property) I don’t see why this kind of luck deserves such a great attention. Like, this is when luck actually gets in (or doesn’t) in our lives… The whole idea looks to me in the same class as going to the church to admit the sins. It in fact, does not solve anything at all though it makes the society looking much better due to addressing ‘inequality’ (in luck distribution) and taking care about general ‘fairness’ of society. Why do I think so?
First of all, the distribution of luck in the society (any society) starts immediately on birth and not at the time when our parents die. Are kids going to public schools less lucky then the kids whose parents can provide them with private education? I think they are. (Just look at this year’s statistics of grades in UK on which basis universities will pick up students).
How about living in urban slum compared with living in decent suburban environment, not to mention much more opulent living environment? Why do we start caring about ‘luck distribution’ or equality when inheritance time sets in?
I think the reason is that in fact we do not want to do anything real to address the fact that 5% of population controls 60% of society’s wealth. Every rich country has a different set of problems in this regard. But, in one point they are all the same: when the discussion about real change starts (like now in the US about medical and health industry) nothing happens. We then resort to discussing whether it is fair or unfair for parents to leave something to their kids and whether leaving 325,000 of something is fair while 500,000 is grossly unfair and 1,000,000 is totally unacceptable. In the end, it all depends much more on the financial condition of the state and is therefore totally arbitrary. If they need more, they will throw the net out with smaller holes; right?
Secondly, while I am aware of some cases where the whole inheritance had to be sold of to pay such a tax, the inheritor still did not end up begging in the subway. Who really gets busted by this tax is the middle class. In Europe there are whole dynasties (e.g. owners of Opel in Germany) who somehow maintain family ownership through generations. How come they (and their likes) don’t end up paying inheritance tax? The answer to that is irrelevant. What matters is that those who figuratively ‘own’ society have to convince the rest of us that they ‘do care’. And that is how we avoid raising conflict level in society due to general and omnipresent injustice. The subject is instinctively changed and from general injustice we start talking about ‘luck’ (being borne privileged) and how to remedy the problem of ‘too little luck’.
Why would leaving to three kinds a house worth 1,5MM (dollars, pounds or euros) require paying inheritance tax? If all three of them can live in such house with their families, (let’s imagine that for the sake of discussion) is it really because it would be too unfair towards other kids from their generation who had to build or buy their place to live? Or is it because we as a consumer society are just trying to force everyone to spend in order for society to thrive?
This is by the way the same argument as the one that says the family as a basic unit of society fell apart during the second half of XX century because it is better for consumer society to have two consumers (male and female) than only one (a couple).
Inheritance tax IMHO has very little with correcting injustice or introducing a ladle for better distribution of luck. In that sense, it is mostly a fake. Why the state does not cancel the lotto if luck distribution is of such concern?
Matje said,
November 18, 2009 at 2:26 am
“Second: it is important to the lives of people in a free society – both parents and children – that parents be able to leave an inheritance to their children.”
I disagree that it’s important for parents to be able to leave an inheritance to their ‘children’.
Given that in the western world, it’s not untypical for someone to have kids around 30 years old and to have a life expectancy of 80, these ‘children’ will usually be well into their 40s/50s before the death of their parents.
Why then do presumably established middle-aged people need to be given more wealth/privilige/power?
Paul Sagar said,
November 18, 2009 at 9:21 am
Matje,
It’s not so much to do with parent’s feeling their children need the money to survive, as to do with it being an important part of the parents’ lives going well that, over the course of 30+ years, they can save up and know they are bequeathing something to their children which will outlast themselves.
I think to many parents, that’s an important part of being a parent – and that state must respect that…but only to a certain point, i.e. where wealth disparities kick-in to such a degree that other considerations take precedence, e.g. the wealth inequalities society tolerates.
Making the case? « Bad Conscience said,
January 13, 2010 at 8:06 am
[...] course – and as I’ve argued before – impressions on this subject can be misleading. Certainly, the state should respect the [...]
F*** Off « Bad Conscience said,
February 10, 2010 at 10:43 am
[...] laid out my reasons for opposing the Tory tax cut for millionaires on numerous [...]
biscuit said,
February 18, 2010 at 5:09 pm
I believe inheritance tax should be removed. Why can’t I leave my money to who i want to leave it with. This gives me more choice. If people believed that they wanted to give their inheritance to government and the government can make better use of it. What makes them from doing so. What is stopping them. They can buy down rain forests to protect them from further destruction. This is free will. I believe in free will rather than policy being slapped on their faces. I don’t believe that the poor should be leeching of from the rich. If the rich wanted to give to the poor they are free to do so. More things should be done to make everyone successful than to make the successful pay for the unsuccessful people. In this world there must be successful people and unsuccessful people. This world should reach an equilibrium where the world’s economy should be a bit near a straight line. More policies should be in place for the better of all of us rather than the better of some of us at the expense of the successful. Do you feel alright if you are stepping on someone’s head to go higher. For some of you i think so.
What motives people to get more than what they can when they will be taxed so much it is not worth. Why do the rich need to work harder when they get taxed so much away anyway. Why would they need to run the company well when they taxed away.
Why would I have a heirloom that is going to tax so much i can’t even keep it. Why would i have to sell the house and land i live in to pay for the tax. Why would anyone work harder when they are not so much rewarded. For me i will laze away at home because if i work harder it wouldn’t belong to me anyway. I will get welfare anyway. Like a test. If i had to stay back if i got 70 marks and above why would i not get 40 marks or even 0 marks. What makes me so that i won’t spend away all my money with my kids. What makes me not want to leave my fortunes in somewhere else. Why can’t we be communist anyway if so. You are taxed for working 40% more would it be worth your effort? There is inequality but i believe the inequality is in the system itself. There are many things . It should be done in a way that doesn’t penalize the those who have toll for it. It shouldn’t be done in a way that takes away someone sweat and blood to those who haven’t earned it as well. I think it would be more useful to tackle exact problems with cost of living and environmental issues first.
The rich isn’t there doing nothing so they got rich. Go out and get rich. It isn’t easy. If they got lotto then they deserve it. If not i dare you to go out and buy lotto and strike. I believe the most of our problem goes to manipulation of property and commodities that increases the cost of living all together. Why you blaming and taxing on the millionaires when not all of them are not doing all of this. I believe in more regulations for some of the industries that are rising the cost of living for everyone namely properties and commodities.
sangfroid said,
February 18, 2010 at 5:36 pm
well, simply put, taxing dead people is a far easier than taxing the living, working ones! that is all! i mean, who are all these dead people who mind where their remaining money goes??? the dead are going to work less hard is we tax them more?!
Paul Sagar said,
February 18, 2010 at 5:51 pm
“Biscuit”
As a general rule, it’s usually wise to actually bother reading the original post before launching into an essay-length tirade, most of the points of which have been countered or addressed in the piece being responded to.
As a general rule.
sangfroid,
It’s not so much about ease – IHT is fairly easy to avoid (at present). it’s more about fairness; why should people receive completely unearned streams of income, tax free? Just because my dad is rich, why should I get his money (which he did nothing to earn) tax-free when he dies? That seems unfair, and unjustifiable in a society that taxes wealth and income transfers.
Tasha said,
March 11, 2010 at 10:42 pm
I am writing this from the perspective of somebody who has been hit by inheritance tax after the loss of my mother in February this year. The only asset of any value she had was her property that I lived in with her. Unfortunately, as with most family homes (excluding flats) within commuting distance from London, this has been valued over the current IHT threshold.
Firstly, in my view the current system makes no allowances for the individual circumstances of those who inherit. Paul – you mentioned IHT is “fairly easy to avoid” but that is only if you know how to avoid it and are prepared for it. Unfortunately, my mother was diagnosed with lung cancer and died less than a year later. All the supposed avoidance tactics were impossible within such a short space of time. We considered selling the property but mum was too ill by that time to go through a major move with all the associated upheavals it would bring.
I was her only child and hence her full-time carer. As you might be aware, family members (or any persons) who are full-time carers only receive a very small allowance of £53.10 per week for what is essentially a 24-hours a day, 7 days-a-week ‘job’. Therefore, this and mum’s disability living allowance were all we had to pay for bills, food and other essentials since my mother could no longer work because of her illness. It was manageable as I have never had a high-paying job but I can assure you that it was difficult, particularly due to the exceptionally cold winter and higher gas bills as we had to keep the house warm all day, every day as mum was house-bound.
So now, after having not worked in order to spend the last 9 months looking after my mum, which I have no regrets about, I am staring at a huge bill that I can’t afford unless I sell the house, which has been my home for my whole life, on top of all the other practical matters that come with a bereavement.
Matje mentioned that most people who inherit are about 40 or 50 years old but I am only 30, so I don’t think you can generalise about the average person who inherits. What about RTA victims, those who die of heart attacks or cancer, or victims who die younger from other accidents or violent crimes?
An option thoughtfully offered by the government is the possibility to pay the tax in instalments over 10 years … but then you have to pay interest on the instalments! This certainly doesn’t make life easier … I haven’t even started to mention the emotional aspect of a bereavement and I am lucky in the sense that I had so long to prepare myself for my mum’s death (although nothing quite prepares you for the shock of losing a loved one).
So I don’t agree that the tax achieves the objective of taxing the rich and distributing it fairly to the poor in ALL cases. I think it has a role to play and shouldn’t be abolished entirely. I agree with Biscuit’s comment that it hits the middle classes hardest but also those people in my circumstances. I feel penalised for simply living in a house that happens to be over the IHT threshold.
Wouldn’t it be fairer for the government to means-test those who inherit property/assets in some way? After all, I have saved the government money by opting to care for my mother myself.