Should Inheritance Tax be defended?

nick cowen, 30 April 2008

Yesterday evening, I attended the Fabian Society’s debate ‘How can we defend the inheritance tax?’ although it might have been more aptly labelled a strategy meeting on how to set-up a pro-tax alternative to the Taxpayers Alliance. For when I had a chance to speak, the only one present to deny the explicit premise that inheritance tax was morally justifiable, the room itself seemed briefly to close in on me. While responses to my argument were never less than polite and well mannered, the initial incensed glares from the front of the room gave the impression that in a less civilized age I could have wound up being sacrificed inside a giant wicker construct of George Bernard Shaw.

Partly as a consequence of this charged atmosphere, my speech faltered somewhat. However, I tried to explain two reasons for disapproving of the tax: that it involved excess cost and government intervention, and that it could sometimes be unfairly levied on those that could ill-afford it. I explained that inheritance tax was, in essence, a tax on a transaction between two individuals; usually close family members, the sort of people whose finances and lives are already closely entwined. The theory is that upon death, someone’s estate should be taxed before it can be passed on to family members. In itself, that is simply a recipe for ensuring that few people will ever die rich: they ensure their property is in someone else’s name when their death becomes likely.
The tax the Fabians propose is not, because of this, one on inheritance but on ‘capital receipts’, essentially a tax on gifts received throughout one’s lifetime whether the givers are alive or dead. So, in order to close what they see as a loophole, the Fabians must transform a tax on a deceased person’s estate to a tax on all consensual one-way transactions between individuals. They may think that enforcing this is a mere technicality, but expanding the breadth from ‘inheritance’ only demonstrates the manifold ways that gifts can be made. If capital or property is too easy to track, the transfer could be made in precious commodities (diamonds perhaps) or even be spent on gifts of more ordinary goods (will the tax extend to Rolex watches?). Or think of the manifold ways that families benefit their poorer (often younger) members: should gifts of university fees, private education, interest free loans, musical and computer equipment all be taxed as something that is really an inheritance paid up front? (Of course, the Fabians propose a tax on school fees as well.) Will all trades between family members have to be overseen by an auditor to make sure there are no family discounts or even ‘mates rates’ taking place, to ensure that an inheritance isn’t being sneaked through via an overgenerous sale?
As consequence, the proposal will produce either widespread avoidance or massive, expensive and intrusive government intervention into transactions between private individuals. This should constitute a major problem for anyone concerned about civil liberties. But it should also constitute a problem for people who want to collect taxes for the state in the most cost-effective manner possible, with a minimum of accountant and solicitor fees and a minimum of need for financial investigation. Of course, many ardent supporters at this Fabian meeting were accountants and lawyers and so reducing their workload (and their legitimate cut from tax appropriations) might not be at the absolute forefront of their minds.
The second problem is that inheritance tax can be levied unfairly on those who are capital rich, but income poor. A cherished family house could attract a tax of tens of thousands of pounds. If the inheritors are unable to pay that price, they will simply have to sell the house to pay the tax. I was told that I was being disingenuous when I made this point and it was explained to me that inheritors are given a decade in which to pay the inheritance tax (for people with no or low income, that doesn’t make a whole lot of difference). The typical comment at the debate was ‘get real’: this isn’t about turfing people out of their homes but taking a legitimate sum from rich middle class families. And they are right, usually. But not always. On occasion the inheritance tax can be levied on people who, with low income, are reliant on family property to carry on living independently. It is levied at a most disruptive time on people who have recently been bereaved. It can significantly reduce the quality of life of some people.
I proposed that if £3-4 billion needs to be raised and it needs to be raised from the rich, it could be done via less intrusive and fairer means, such as a tax on property that could be levied systematically rather than at the point of a transaction or simply a higher income tax, anything that was easier to collect and less likely to target people unfairly.
However, it appeared that this wasn’t really a debate about tax, or how to get it out of the rich. It was about equalising what the Fabians call ‘life chances’. They see the level of opportunity that an individual has as being primarily defined by the amount of wealth they have access to (or at least the amount of money the government holds on their behalf). But the relationship between life chances and wealth is rather more complex than they allow. Indeed, it might turn out to be truer to say that it is more life chances that cause wealth. Civitas is trying to tackle the problem of life chances from a different perspective. Rather than reducing the problem to mere capital investment, we look at the structural failures that interfere with life chances, especially with respect to family structure and education. Wealth certainly has value, but a good upbringing combined with access to genuine education is priceless. Investment by the state is not sufficient, or even necessary, to bring those about.