Tuesday, 14 April 2015

Don't Listen To The Majority Here - Inheritance Tax Is One Of The Very Best Taxes

After reading today about the Conservatives' promise to raise the inheritance tax threshold, we also learned from a YouGov poll that the public regards inheritance tax as the least fair of all taxes. Most libertarians also tend to oppose inheritance tax, largely due to the fact that it's a tax on capital that's already been taxed at the point of being earned. However, given that tax in general sits uneasily in many a libertarian milieu, their general disenchantment for inheritance tax is hardly surprising.

I happen to disagree with libertarians and with the general public on this. I think that in a world in which taxation is a current necessity in our socio-political system, inheritance tax is about the least bad tax we have. I'll explain, but let me first explain what I do think is bad about inheritance tax.

The negative aspect first
If you can get over the double taxation part, the primary problem with inheritance tax is that it encourages excessive/wasteful spending. If Betty has £650,000 that she stands to leave to her children but knows that they will be hit with inheritance tax, it incentivises her to spend it on them or on herself in her lifetime. It may be a good thing for her and her family that she's spending, but spending money just to avoid giving it to the government is probably going to involve quite a bit of expenditure on things she doesn't really need or value hugely. This wisdom soon percolates: "You can't pass it on so you might as well spend it".

Now over to the positive
I think it's good for society if the government takes something from a dead person's estate when it exceeds a high enough threshold, but it's also important that the government endorses passing on money to heirs that's already been taxed once. The real issue with the government taking something from a dead person's estate and pumping it back into public services is that it spends it on people less in need than the people on whom it should be spent - namely the country's neediest people. I'll come back to that in a moment.

Even if you are Anglo-centric in your redistributive desires, what makes inheritance tax a knotty issue is that it's a bit like higher tax for the rich in general - the majority support it because the costs don't affect them. Currently inheritance tax sits at 40% at a threshold of £325,000. If you're about to be the beneficiary of your dad's £500,000 estate you probably don't support the current threshold because it will cost you £70,000. But if you have no substantial inheritance due to come you probably do support it, because somewhere down the line you'll benefit from other people's inheritance tax.

The most desired goal of the taxpayer is to be taxed in a system that is as fair and efficient as possible. Most taxes fall below an ideal because they come with disincentives (income tax comes with a disincentive to work; savings tax comes with a disincentive to save, and so forth). Even if you are one of the people that stands to inherit a fortune and thus doesn't like inheritance tax, it has to be admitted that as far as the whole of society goes, inheritance tax ticks just about every box in terms of fairness and efficiency. Technically, the person paying the tax is the dead person - it is just a posthumous tax taken from assets no longer needed. Even if you happen to be the imminent beneficiary of your dad's £500,000 estate, you stand to gain £430,000 after tax - which, by any reasonable standard, is enough for a house, a car and a small business.

Moreover, be sure of one thing - if the government doesn't get tax from inheritance it will get it from somewhere else. If it ditches inheritance tax or raises the threshold then a few heirs will benefit, with the rest of the country picking up the bill in increased taxes elsewhere.

There is some truth - much truth maybe - in the notion that it is unfair to tax people twice, but that throws up a different can of worms which I talk about here in this blog Thou Shalt Not Inherit. The content of that Blog post could cast a few aspersions over inheritance tax, but I think the real problem with it (to return to my above point) is that it would be much easier to support it if the government spent its money more wisely. Suppose, for example, the government used all the inheritance tax money it gathered to pump finances into the vital areas of the charity sector that have seen too many drastic cuts. That would be a hugely positive use of the money. But while they spend so much money so unwisely it is easy to be down on taxes like the inheritance tax - even though, compared with just about every other tax, it's just about the least bad tax of all in terms of who pays for it, and in terms of incentives against it.