Reforming inheritance tax

I don’t know–sounds problematically sane to me.

the main (nonsensical) argument in the debate in the US on abolition of the inheritance tax there was that it meant taxing people twice: once onw hen they earned their money, and once on when they left it to their poor starving children.

That argument would be refuted if indeed you tax beneficiaries instead of estates.

I’ll add that as a political compromise I think the Darling plan is quite clever. It has been said that the adding together of the allowances by a couple if already possible, which is true, and hence it suceeds in not costing much but making the (generous) allowance size much more explicit. It also protects a lot of revenue, as regardless of what people like Nick Cohen say, inheritance tax was paid mainly by the rich. Finally it means the Tories now have a policy of scrapping inheritance tax on estates between 700k and 1mk, which is hard to spin as being the ‘middle class’, and from 350k to 700k for people like Mick Jagger.

Its not a tax “on wealth,” but a tax rate on income that is based on wealth. A tax on wealth is paying tax again on income you have already earned because your total wealth is over some threshold. In Sweden if your net worth is above a certain amount you pay a small percentage on your net worth in tax. That is a real wealth tax.

One problem with the suggestion of taxing beneficiaries on inheritances as if they were income is that instead of just 5% of people paying it, nearly 100% would pay something, and for many it would be their first taste of higher-rate taxation (and somewhat unfairly given it would be a one-off boost). And although presumably income tax could be adjusted to make the impact revenue neutral I think it would be a political disaster.

It is difficult to justify inheritance at all on equality of opportunity. Just two generations of non-extraordinary upward social mobility hugely improves the prospects for wealth accumulation of some in comparison to others, completely independent of anything they will accomplish in their lives. As such abolishment of the right to pass on one’s wealth, as has been suggested by many, does have at least the theoretical basis for wide support along normative lines. One could pool the resources of the dead and distribute them equally to all individuals when they reach a certain age, for example.

Equality of opportunity is a widely held ideal both in theories of justice and in many political societies. But taking the consequences of a commitment to equality of opportunity seriously is not as common. In the case of inheritance there are clear practical and what might be called emotional reasons that make the prospect of a system of no inheritance not very plausible. Rawls’ solution seems to be a typical realisable utopia. But what about our intuitive feeling as parents that we should have a right to pass on wealth to our children despite the apparent societal affects on equality of opportunity. Are we just being badly partialist or is there something more justifiable going on here?

I wonder if support for the abolition of Inheritance Tax was boosted by the creation of the National Lottery? You could see people that are convinced that one day they will win, so they don’t want their winnings taxed, if they have any left to pass on to the kids, that is. Probably a trivial effect (even if it has one), but you never know – there seems to be a lot of people with a very skewed idea of probability.

I’m not sure, given O’Neill’s concern for the political stigma faced by IHT, why he just doesn’t argue for a kind of ‘bequest income’ tax on ANY gifts individuals receive over a lifetime. We could all have a lifetime allowance of 500k or whatever, and any gifts, trust income etc above that gets taxed at the same rate or at rising progressive rates. Or is this what he’s suggesting anyway? I’m confused!

But what about our intuitive feeling…

I think it’s because our intuitive feelings fail to scale properly. Should we have the right to leave a thousand dollars to our children? Sure. Hundred thousand? Sure. Hundred million? Hundred billion? What’s a hundred billion dollars, what does it mean?

The “L-curve” guy is trying to explain (again, in terms of income, not wealth, which would be even more striking).

It also would still not solve the ‘problem’ of people who genuinely just want to live in a ‘family house’, although I think this is rather overstated.

Overstated in practical terms, but in emotional terms I am pretty sure that this is the real engine of the political problem (and a similar issue exists for unincorporated family businesses, particularly ones like shops which are tied to a particular piece of real estate).

Drat, it looked like a functioning link on preview.
http://www.revenue.ie/index.htm?/revguide/capitalacquisitionstax.htm#thresh07

Regarding the question of the threshold, it seems to me that Gordon Brown’s introduction of the lifetime allowance for the tax treatment of pensions offers a precedent that could be extended to cover all capital (as opposed to income) taxation.

This pension provision holds that a person who, through income tax relief on pension contributions and tax-free capital growth, accumulates a pension fund above the lifetime allowance (currently GBP 1.6 millon) is subject to a tax clawback.

Given such an acceptance, in principle, of a lifetime allowance for capital taxation, why not subsume the taxation of inheritance (on the beneficiary rather than the estate), capital gains on owner-occupied housing and on pension commencement lump sums (PCLS) under a single comprehensive capital tax (CCT)?

A tax payer with ordinary chargeable (indexed) capital gains would be able to elect either to pay tax on them at marginal income tax rate in the year they arose or set them against the lifetime allowance if he had no expectations of any large bequest.

The current pension clawback could be replaced by the inclusion of PCLSs under the CCT on a non-retrospective basis together with a cap on the annual amount of income tax relief (at marginal rate) claimable, without any limit on the amount of contributions. This, over time, would tackle the real regressive anomaly in pensions, namely that PCLSs represent money which rather than having suffered double taxation has seen only a small investment dividend income tax deduction.
Perhaps it would be necessary to sweeten the pill by retaining tax relief on the use of a PCLS to cover a single premium long term healthcare insurance policy, but that would not seem too great a compromise.

Naturally stamp duty would be abolished as part of the reform which would also increase the equitability of the package. At present the interaction of stamp duty with the almost complete freedom of owner occupied housing from CGT has the perverse effect of rewarding with the largest tax free capital gains those who paid least in stamp duty through buying when house prices were lowest.

It would remain simply to choose (an) appropriate CCT rate(s) and band structure, and set the lifetime threshold and a formula for its indexation. I would favour default indexation of the threshold for any one citizen in line with prices, but the initial threshold for a new-born being set from 5-year rolling average of GNP. A flat rate lower than the current 41% higher rate tax plus social security marginal rate but higher than the standard income tax rate (dropping from 22% to 20% next April) would be my preference for the rate/banding. As to what life-time allowance this would imply, I’ll have to defer to any spreadsheet wizard who might still be reading.

The estate/inheritance tax may be a blunt instrument. But it’s relatively easy to implement compared to alternatives.

Not really. That’s one of the fundamental problems with the US-structured estate tax; it is so avoidable that more is spent avoiding it than is collected by it.

An inheritance tax has the further advantage of equalizing treatment between the already-wealthy and the newly-wealthy; one major problem with the current system is that is serves very effectively to protect the relative advantage of those who already have trust funds.

My proposal would be to tax inheritances, gifts, and income from trusts and so forth at standard income tax rates, above a threshold–say 50% of median income per year, and a 1-time exemption of 20x median income (enough to transfer a house or shop).

As others have pointed out, you don’t have to be any kind of leftwinger to be in favour of inheritance tax, just someone who believes that “equality of opportunity” is something more than a dishonest slogan, ie. a non-hypocritical liberal. Unfortunately, as this latest debacle shows, there aren’t too many of them about.

Chris @ #13:

Given the empirical assumption this might justify a social planer in allowing inheritance in the way you describe. But it does not say much about justifying the individual view that they have a right to pass on wealth.

Surely and individual cannot say that the demand on them that they not contribute to an unfair social structure fails on the ought implies can criterion. They certainly can act in a way that has better outcomes than the Rawlsian plan. In other words one can easily act in a way that, if everybody else acted in the same way, would result in the same output but more equality. I guess this is simply the Cohen thing and I need to be reminded how the liberal would argue for the idea that some conception of over demandingness justifies strong limits to our other regarding duties.

A little twist in this case is that our self-regarding interests are bound up with other people, potential inheritors, but I do not think that makes much difference.

Can someone give me more than the Scanlon answer because I do not think he gives us much in the way of identifying the right levels of demandingness.

“My impression is that people’s dislike for inheritance tax, even though the chances are they’ll never be affected by it, is aspirational. So at this precise moment, they are not affected by it, but they’d quite like to be, and who knows, in the future they might be (even though they won’t). Never underestimate people’s ability to wish things for themselves, and make decisions based on hopes and dreams.”

“An opinion poll last week showed that the majority of people knew inheritance tax was never going to affect them in either direction, and yet supported its repeal. And presumably the ones who get really steamed up about it want to inherit a lot of money, they don’t want to see it spread out amongst many others.”

I don’t think either of these are right, but they are at least attempting to understand the issue. Noone here wants to address what is essentially a different values system that you folks hold compared to what the majority (apparently, at least in the US) hold.
Your value system: if someone has a lot of money, it should be taken from him, simply because he has it.
Broadly held value system: if someone has something, its his, and it should be taken from him ONLY for just, or defensible, reasons.

Most people don’t see someone with money and think “that guy has money! Let’s get it!!!!” They have the intuitive sense that personal property is personal property. There are obvious exceptions, and the progressive income tax system is considered acceptable because its considered ‘fair.’ Nothing is scientifically defined in this argument, it is more of a feeling or intuition what ‘fair’ is. Arguing that ‘old man, you have alot of money. We’re going to get a whole bunch of people to take it from you so you can’t give it to your kids’ isn’t ‘fair.’

Your counterargument-that someone with alot of money shouldn’t be allowed to give it to his kids because it will lead to some type of unfairness in two generations, or could evolve into a feudalistic society, or even the more direct argument (people having lots of money is inherently unfair) just doesn’t cut it. You may come up with academic arguments, but people don’t buy them.

Thus, the two commenters quoted above get kudos for at least trying to broach the subject. But neither are correct. Your average factory worker who opposes the inheritance tax doesn’t oppose it because he thinks he’ll be rich someday, or thinks he has some secret rich uncle that’s going to come out of the woodwork, or is steamed that his retirement benefits will be given to lots of people. He simply thinks that taking someone’s stuff for the simple reason that he has that stuff is unfair.

Sk

No, Steve, you are wrong. We were talking about the UK and the “average factory worker” here does not “oppose inheritance tax” nor do the majority of people here share your idiotic “value system”. So either come up with something resembling an argument for your views or shut up.

I think SK is absolutely wrong. A factory worker (and I) are not opposed to the idea of inheritance tax as such. What they oppose is unfairness and the maintenance of unfairness. Inheriting property/wealth worth x is one thing and inheriting 1,000,000x is different. People oppose inheritance tax (if they do) only because they lack a full understanding of (a) the justification of the tax —so many thanks to Martin for setting the record straight— and (b) how they might be affected in reality. People do not oppose the tax because they will be hurt if Paris Hilton will always be a millionaire (or more), but unable to inherit all millions she may be awarded had there been no inheritance tax.

I think I could easily defend the concept of “taking someone’s stuff for the simple reason that he has that stuff”, especially if that someone has a shitload of stuff. I just don’t see anything sacred about owning stuff. You can only own stuff if I agree that its yours, that’s all. And I insist on my right to disagree.

Paris Hilton doesn’t have to work a day in her life and she consumes tons of stuff other people produced. Why? Why do I and other people have to work for her? I don’t see how this is my religious duty. And if those factory workers do, they can send her their own stuff, fine with me, just leave me out of it.

“An opinion poll last week showed that the majority of people knew inheritance tax was never going to affect them in either direction, and yet supported its repeal.”

This isn’t my argument, this is someone else’s. I find it plausible.

” A factory worker (and I) are not opposed to the idea of inheritance tax as such. What they oppose is unfairness and the maintenance of unfairness.” If the poll results above are accurate, this is incorrect.

“I think I could easily defend the concept of “taking someone’s stuff for the simple reason that he has that stuff”, especially if that someone has a shitload of stuff. I just don’t see anything sacred about owning stuff. You can only own stuff if I agree that its yours, that’s all. And I insist on my right to disagree.”

I know. I’ve even said so-most of the people on this site agree with you. But if the poll results are accurate, most of the people in the US don’t.

“Surely it’s both, or all, these reasons. But it’s not unfair to take some money from very rich people, because: 1) they and their descendants don’t need colossal wealth to live a full life (see Andrew Carnegie, above); and 2) that money could do a great deal of good, especially in the United States, where infrastructure, public education, and social services are far inferior to those in less plutocratic societies.”

We already know this. Most of the people here agree with you. Most of the people in the US don’t.

“No, Steve, you are wrong. We were talking about the UK and the “average factory worker” here does not “oppose inheritance tax” nor do the majority of people here share your idiotic “value system”.”

If the poll results quoted above are correct, then, you are wrong. The ‘average factory worker’ here does in fact oppose the inheritance tax. I can’t say for sure why, my I suggested why. I don’t think it is for the other reasons mentioned here (secret aspirations, concern that one’s stuff will be spread around, etc).

“My position is that if we are serious about the principle of equal opportunity for individualsthen we should also be serious about making sure that conditions for individuals are such that they do in fact have fairly similar opportunities.” We already know that-in fact, most of the other people here agree with you. But most of the people in the US don’t-or, they don’t believe in it enough to justify harsh inheritance taxes.

“Your counterargument-that someone with alot of money shouldn’t be allowed to give it to his kids because it will lead to some type of unfairness in two generations, or could evolve into a feudalistic society, or even the more direct argument (people having lots of money is inherently unfair) just doesn’t cut it. You may come up with academic arguments, but people don’t buy them.” This is undeniably true. If people did buy these arguments, then poll results wouldn’t show that people oppose the inheritance tax.

“As a general rule, any argument that “people oppose X” (though you support X) because “people are ignorant” is unpersuasive, and at a minimum requires that you show people actually are ignorant.” I agree. I don’t think people oppose inheritance taxes because they are ignorant. I think they oppose inheritance taxes because they have a differing values system. Its rough around the edges (That’s what I mean when I say its not well thought out, and there are exceptions-such as the progressive income tax). But ultimately, I think the difference between the majority here and the majority in the US is one of values.

Sk

How about exempting, or deferring taxes, for illiquid unincorporated assets? If someone leaves a farm, or unincorporated business, or home, or art collection, the recipients either don’t pay, or don’t pay until they sell or take an additional mortgage on the asset. For shares, bonds, cash, and other liquid paper assets, they pay the tax on money above $XXX thousand or whatever at the time of the closing of the estate. That protects the family home, farm, and store from having to be liquidated to pay tax, while still taxing the vast majority of the relevant wealth, which is held in shares.

Using deferred taxation for high-value illiquid assets would inhibit(though not outright stop – the deferral may have value) the purchase of Monets for tax avoidance, because the kid couldn’t liquidate his Monet, either buy selling it or borrowing against it, without paying the tax. Better to leave it in assets which earn a return (Collectibles tend to be bad investments), even if the heirs have to pay tax. So long as the tax isn’t ridiculously high, it shouldn’t distort too much, and will collect a fair bit of revenue.

Alternately, have the assets inherit the ‘basis’ for the assets for capital gains tax purposes. Instead of resetting the ‘purchase value’ for capital gains taxation, set it to the value when the bequestor had purchased it, just as if he were still alive. That would ‘capture’ the value the government is ‘owed’ in capital gains upon sale, but not force sale immediately. I would prefer this happen along with an overall reform of capital gains in the US context. (Treat realized gains more like ordinary income as far as tax rates are concerned, but inflation-adjust it, as an example. ) I don’t know the UK treatment of capital gains.

I assume the push to restore multi-generational wealth is a result of the new rise of a super wealthy class in the UK. It would be interesting to know if there is an organized propaganda campaign parallel to the one in the US.

I can’t think of anything particularly – the nearest I can think of there have been some programmes following people that had inherited stately homes and turned them into museums or opened them to the public due to inheritance tax issues. But I don’t remember them pushing the issue much, and the principles involved weren’t always painted in a very flattering light either.

If it was going to start anywhere, you would think the Daily Mail would be first in line to push that sort of propaganda, but a moderately recent article from them didn’t seem abolitionist in tone, just bashing Brown for not pushing the thresholds up in line with house prices.

rvman: “How about exempting, or deferring taxes, for illiquid unincorporated assets? If someone leaves a farm, or unincorporated business, or home, or art collection, the recipients either don’t pay, or don’t pay until they sell or take an additional mortgage on the asset. ”

In other words, to do it the way that the USA did indeed do it. The anti-estate tax people couldn’t come up with an example of the vaunted family farm being sold, for example.

As a general rule, any argument that “people oppose X” (though you support X) because “people are ignorant” is unpersuasive

However, if you’ve already come to the conclusion stated then you’re likely to consider that a persuasive argument is either impossible or ineffective.

I think SK’s point about people don’t see the rich and want to take their money off them, hence their opposition to an inheritance tax they’ll never pay, doesn’t really work because they seem pretty relaxed about taking 40-50% of the income of people who by comparision aren’t that rich. So it has to be something to do with inheritance as inheritance.

Off topic, but an interesting correlary of this discussion:

When seeking to fight against any policy inconvenient to the rich, the most effective strategy might be to lobby hard for a lottery system, particularly one that advertises like crazy.

Every ad for the lottery is a small step in aligning the poor with the rich at the ballot box. This is especially true with very high payout, low probability lotteries. People with a possibly $300 million ticket in their pocket might just decide that the marginal tax rate for the wealthy is a little too high.

Then you just get the local education budgets dependent on the lottery and you’ve got a strong progressive base to support all that advertising.

Anybody seen any research on this? Perhaps cross state comparison of party affiliation with the creation of a lottery?

My comment about people disliking IHT perhaps for aspirational reasons was actually not meant to be a comment on differing value systems, and more a criticism of misleading convictions that anyone can make it to the top. A quick look at the current state of social class fluidity (or lack thereof) at the moment can tell you that’s not terribly likely. But some of the upper classes will have you believe they got there by skill and hard work alone and therefore anyone can make it – thereby managing to persuade poorer schlubs to support them in their wealth. When in actuality they probably are there because of inheritance. Which they now get more of. It’s devilishly clever, you must admit.

There is already ample evidence that the public is widely ignorant (or, if you prefer, “misinformed”) about the estate tax. Here’s a sample, based on results from a 2003 poll:

Even though fewer than one in 50 people will have estates subject to the tax upon death, 69 percent of respondents who oppose the estate tax think it will affect them personally. […] Shockingly, 49 percent of those surveyed think that most families have to pay the estate tax. There are no personal predictions here – the American public is off by 47 percent. This is not a rounding error; it is a wholesale misrepresentation of the situation, a misrepresentation that is easily identifiable as such. […] The poll asks if people would look more favorably on the estate tax if it exempted the first $1 million. Ten percent of those polled switched sides to opposing estate tax elimination. That talented tenth was never told that the current exemption (for the 2002 taxes we just filed) is $1 million.

And on, and on, and on…

Just to be absolutely clear, the post was about the UK, where nobody has even proposed scrapping inheritance tax. The Conservatives’ proposal was to raise the ceiling on inheritance tax exemptions and to pay for this by levying a new tax on wealthy UK residents who are domiciled abroad for tax purposes. So the proposal appears to have nothing to do with anyone sharing sk’s “value system” about higher taxes on the rich being inherently evil. In fact, shocking though it may be to sk, most people here really could not give a rat’s arse what “the majority of Americans” think about our domestic policy, let alone our “value system”. So once again I would suggest that sk try to come up with some, like, arguments for his or her views, rather than relying on tendentious and irrelevant claims about what “the majority of Americans” believe.

Sorry, Uncle Kvetch, I wasn’t objecting to your comment at all, just sk’s claim that most people share his taxation-is-theft “value system”. Somehow I doubt it’s true in the US either…

Following up Uncle Kvetch’s already pretty conclusive proof of public ignorance, I’ll add this, from the O’Neill article:

“Surveys found that 20% of Americans believed that they were in this top 1%, with a further 20% expecting to come into this bracket in the near future!”

That certainly sounds like misguided aspiration rather than a conflict of values.

The full poll results are here, Shelby. Here’s one of the relevant questions:

51. Do you think that most families have to pay the federal estate tax when someone dies or
only a few families have to pay it?

Most families have to pay 49%
Only a few families have to pay 33%
Don’t know 18%

Also (quoted in the study linked above):

Mark J. Penn, “What Americans Really Think About Bush’s Tax Cut,” March 2001: http://www.ndol.org/blueprint/spring2001/penn.html. “A key feature of President Bush’s tax cut proposal is the elimination of the estate tax. The estate tax is now levied against estates of more than $600,000. That exemption will soon rise to $1 million. Only the top 2 percent of estates are now subject to the tax. Which is closer to your view?” “We should eliminate the estate tax,” 23% – “We should leave it as it is,” 16% — “We should exempt small family farms and small businesses from the estate tax, but not multimillionaires,” 56% — Don’t know, 5%.

NB: My last comment was not meant as snark, fuzzy, but rather to amplify an interesting lateral take on the underlying issue here.

Martin O’Neill in his NS article says : “…a simple appeal to the illegitimacy of the government expropriating “my money”, simply short-circuits reasoned debate about tax. Yet, this “libertarian intuition”, as philosophers Liam Murphy and Thomas Nagel call it in their book The Myth of Ownership, is pervasive, and difficult to budge. Clear thinking about IHT, as about all taxes, demands that we do budge this ‘libertarian intuition’ aside.”

Good, but to make the libertarian intuition budge, O’Neill should for starters accurately characterize it. Oddly though , he seems to think that the ‘my money’ idea is best captured as the belief ‘in the glories of free market’, but this is a half truth and explains why O’Neill is speaking ,in part ,to the converted and secondly, if his criticism is construed as a criticism of the ‘libertarian intuition’, it is off target.

‘My money’ intuition actually rests on entitlement view of distributive justice ( fleshed out and defended by Nozick in ASU ) and this involves :

1)rejection of the background picture O’Neill is subscribing to : that holdings exist like ‘manna-from heaven’ and need to be distributed according to some pattern to be just.

2)the belief that “freedom upsets patterns” : ” socialist society would have to forbid capitalist acts between consenting adults “.

I do not see Martin O’Neill doing much towards making this view budge.

Oddly though , he seems to think that the ‘my money’ idea is best captured as the belief ‘in the glories of free market’…

No, he doesn’t.

I’m afraid Zdenek’s argument involves fallacies of non sequitur and equivocation, considering that the word “intuition” is defined as direct perception of truth, fact, etc., independent of any reasoning process.

I was certainly affected by the estate tax, even though on current trends it is not at all likely that my estate will be taxed.

I don’t see it that way, and the poll question I cited above (#63) certainly doesn’t define “affected” in that way. To restate: 49% of respondents believed that most families are subject to estate tax when someone dies. And this is utterly false.

So, despite your and Shelby’s best efforts, I think my point stands. A very large portion, if not an outright majority, of the American public is woefully ignorant of the basic facts about the estate tax. This is not an accident, but a result of deliberate political action, from semantic flimflammery (renaming the estate tax the “death tax”–you can’t even die anymore without the gummint grabbing your stuff!) to flat-out lies (the mythical hundreds [or is it thousands?] of family farms and small businesses liquidated every year because of the tax).

Sam, help me out. I think what you’re arguing here is that most households are, at some point in time, and to some degree, however minor, affected by the estate tax. And that therefore the public is not misinformed after all.

And you know what? I’m still not buying it. I can provide my own personal anecdotal evidence: The households of my own extended family (and I have a whopping 24 first cousins) have never been affected by the estate tax in any way whatsoever. So, beyond your anecdotal evidence, do you have any data?

I thought the idea of a family as an economic unit started getting obsolete somewhere around 18th century. OK, ‘conservatism’ – sure, I understand – but isn’t this a bit too much?

The reason I thought my anecdotal evidence was likely to scale was that with houses in many areas selling for close to the (old) $600k exemption, a lot of families would have had some member who died and had a house, a car, and enough savings to get to $600k.

Makes sense. And I agree that there’s a certain ambiguity to the term “affected” in the poll: “I envision my own estate being subject to the tax when I die” vs. “I envision inheriting a portion of an estate that will be subject to the tax.” I don’t think this fatally undermines my point about the public being generally misinformed (and you seem to agree with me on that), but it would be nice to have polling data that made this clearer.

Labour have reacted concessively to a populist Tory attack on the tax

Uh, oh. 20 years of that crap is what reduced Democrats in the USA to a pile of mush.

Not a great pattern to repeat.

Worth noting on the differences between the US and the UK on this that because the threshold for IHT has not gone up at all in the UK for a considerable period of time (and certainly has not kept pace with rising house prices, especially in the South East) it is no longer perceived as a tax on the rich but a tax on the middle classes.

This may well still make it a progressive tax and so on, but it can no longer be argued that it a tax to prevent or ameliorate the effects of major hereditary wealth. The argument for justification in the UK, if it can be made, is why it hasn’t kept pace with rising house prices and why it has, in effect, changed its focus and function. No one has yet bothered to try to make that argument.