Wednesday, 10 October 2007

Inheritance Tax

Inheritance tax seems to be making the news at the moment, with both the Tories and Labour trying to outdo each other in reducing it. This only goes to show just how similar the two big parties have become. Inheritance tax should, if anything, be increased.

One thing that seems bizarre to me is quite why so many people worry about inheritance tax in the first place. In reality it simply isn't an issue for the vast majority of us. Last year 40,000 estates in England and Wales were liable to inheritance tax, while the same year there were 502,599 deaths. As a very rough guide that suggests that considerably fewer than ten percent of people who die have to worry about the tax at all. The reason that people worry about it is because they have an irrational optimism of their own financial future. Let's face it, most of us don't get rich. It's the sort of thinking that makes the public hostile to policies like 50% income tax on earnings over 100,000 - there's no way that's going to be a problem for most people, yet you hear people saying things like 'why tax success?' and other nonsense.

So what about the level at which the tax is payable? Well, until today it was 300,000 pounds. It has now (or will shortly) go up to 600,000 - a level which a tiny percentage of estates will reach. I think that this is a terrible decision, and if anything it should be reduced. The level at which tax starts to be paid all rather depends on what you want the tax to achieve, and inheritance tax is basically performing a redistribution function. It is one of the methods the state uses to make sure that too much money does not stay in the hands of too few people. If anything, this is becoming more of a problem, not less, so why on Earth are we reducing the effectiveness of one of the tools that we can use against it?

It's worth tackling the 'I've paid tax on it once, why should I pay again?' argument too. The reason that people are suddenly concerned about the tax in the first place is because property prices have increased so much. Houses have gone up in value far faster than inflation recently, which means that an initially modest investment is now worth hundreds of thousands. What people seem to forget is that the sum where 'tax has already been paid' is usually a small percentage of today's value, so in fact for most estates only a small percentage of the value has had tax paid on it anyway. It's only right that tax is paid, and paying once you've died seems like the most convenient time to me.

In the end we have to tax people on death precisely because property prices are high. By placing a tax on inherited properties people will be forced to sell them, placing the house back into the market. More houses on the market will help to bring prices down to a reasonable level, benefiting everyone. If the tax is reduced then the government will still need that money so they'll just tax something else, and that's going to be something that we all have to pay when we're alive, and probably something that has to be paid by far more people. Inheritance tax has so many logical advantages to such a majority of the population, so why has reducing it become so popular with voters? In the end we can probably put it down to selfishness and misplaced optimism, yet again. And so the wheel of capitalism turns...


Jock Coats said...

Why wait till someone dies? Why not tax land values all along, throughout the period of ownership? Surely better than waiting till they die?

Tristan said...

What Jock said.

Followed by the comment that you're not taxing the dead person, you're taxing the beneficiaries of their estate.

This is unjust - you're penalising people for other people's hard work - that's even worse than penalising people for their own hard work.

Lastly if so few people pay it, why bother with it at all, surely its just another layer of regulatory burden which it would be better to simply remove to reduce the size of government and reduce its interference in our lives (which is what liberalism is fundamentally about).

Dominic said...

Taxing an estate when someone dies seems fairer than taxing it all through their lives. After all, you can't take your money with you.

When it comes to Tristan's point about taxing beneficiaries then yes, they are being taxed. However, they are also receiving a tax-free lump sum of several hundred thousand pounds, so I have absolutely no sympathy for them. Let's be honest, someone with 300,000 (or 600,000) pounds when they die is rich compared to most people in this country.

A liberal society is only really achievable when the rich and poor are on a pretty much equal footing. Redistribution of excessive wealth is a necessary part of this. In some ways, social and economic liberalism are different goals, with social liberalism being an order of magnitude more important.

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