Tuesday, 25 July 2017

Why Graveyard Robbery Will Hurt The People It's Trying To Help

A columnist called Abi Wilkinson suggested in The Guardian yesterday that the government should fund the welfare state with a 100% inheritance tax. It's a nice idea, but like many nice ideas it reeks of confusion regarding the consequences of such a short-sighted brainwave: consequences that would hurt the people the policy intends to help - the poor.

To understand why the policy is a bad idea, it's important to understand the difference between money and resources. A 100% inheritance tax would send a message to anyone with any equity along the lines of "Your loved ones cannot inherit any of your wealth, so you might as well spend all your money before you peg it".

But that's another way of saying "Hey, consume more raw materials while you still have half a chance - oil, steel, timber, etc - and leave fewer resources for others". Encouraging more reckless and less prudent spending to avoid being taxed at 100% on your death means consuming more resources that are then no longer available for others to consume, or are more expensive with which to build factories, and machines, and equipment, and schools and buses. This ultimately hits the poor hardest in terms of the opportunity costs of fewer jobs and more expensive goods and services.

A 100% inheritance tax encourages us to swim against the tide of progression we've enjoyed in the past decades. All the technological advancements, the innovations, the research, and even the increased capacity to help those worst off in society through welfare payments, have come from job creation, which came from using raw materials in an effective way. Part of what made that possible was the availability of resources when people with equity were able to conserve their assets - something they'd be disincentivised from doing under Abi Wilkinson's idea for daylight grave robbery.

You may be tempted to argue that if we allow inheritance then wealthier people may consume less but their heirs will consume more, so the result is pretty much the same. But that's not true - judicious consumption delayed is still better than ostentatious and injudicious consumption in the here and now, as UK citizens get years of forgone raw materials to consume, and additional production from which they will benefit.

A tax that encourages any transactional behaviour that is (at best) sub-optimal and (at worst) tantamount to reckless overconsumption is going to be a bad tax, and one that will hit low earners and jobseekers hardest, as in many cases it will have the knock on effect of increasing prices and decreasing job opportunities.