Monday, 6 August 2007

The least worst tax

There is something distasteful about massive fortunes acquired by a mere accident of birth. I will happily defend inequality, when it comes about as a result of some people working harder, showing more initiative and taken more risks than others but when it is based solely on certain individuals being lucky enough to inherit money then it is indefensible. So I am rather bemused why anyone would be campaigning to abolish inheritance tax. It is without a doubt one of the best ways of taxing people: it does not reduce incentives to work and is only paid by a wealthy minority. There would be a real cost to scrapping it because you would have to increase other taxes to pay for it.

A market economy rests on a bargain. The rewards for our labour (our wage) depend on the value put on our work by the market, which in turn reflects the demands of other members of society expressed by what they are willing to spend money on. In this way we are given incentives for people to do the type of work that the other members of our society think is most valuable. This results in a wide divergence in incomes but we accept this because it is in our interest to do so. It may irk us that a doctor is richer than we are but if the alternative is not getting medical care, then it is a price most people are willing to pay.

Inherited wealth does not provide any such incentives since it is acquired by being born into the right family rather than by actually doing anything. For this reason, a tax on it is an ideal way to help fund government spending.

Abolishing inheritance tax would create a bizarre situation, where somebody who goes out and earns a fortune has to hand over almost 40% of it to the taxman but the Paris Hiltons of this world, would pay no tax at all on money they have acquired for doing nothing other than being born.

The arguments usually used to argue for the abolition of inheritance tax tend either to be logically incoherent or factually inaccurate. Take, for example, the claim that it means someone paying tax twice on the same money. The problem with this reasoning is that the money has changed hands, the income tax is paid by the person who bequeaths the wealth and inheritance tax by the inheritor.

The claim it is a tax on the middle class is only true due to the rather elastic way we English define the middle class. There is no way a middle income family is going to pay it. The inland revenue estimate that a mere 4% of estates are eligible for inheritance tax, which makes it one of the most progressive taxes out there. This has posed a bit of a problem for those who want to scrap the tax because it is hard to get people worked up about a tax they are not going to pay. But do not fear many of these enterprising campaigners have found a way around this problem: lying. In his book, lies and the lying liars who tell them, the liberal comedian and journalist Al Franken, shows how Republicans campaigning for the repeal of the estate tax in the US consistently misled voters about who paid the tax. The estate tax affects an even smaller portion of the population than its UK equivalent yet Republican TV adverts showed people who own small farms, fretting about having to pay 'the death tax.' Here in the UK the role of the Republican party has been taken n by the Daily express, which constantly talks of ordinary families facing, what they have started calling 'the death tax.'

It is true that the number of people paying inheritance tax has increased in recent years. But what this represents is how the property boom has created many more large estates and pushed up levels of inequality. In this context, inheritance tax is more important than ever.

This is not to say that inheritance tax is perfect and that it could not be made to work better. A recent paper from IPPR sets out the kind of changes that are needed. Notably closing loopholes to reduce evasion and basing the tax on accessions rather than legacies

The debate over inheritance tax is part of a wider debate about the kind of society we want to live in. Do we want a meritocracy or an aristocracy. Do we want social justice or social privilege. Do we want a society united by opportunity or a society divided by inequality. There is no reason to scrap inheritance tax and every reason to keep. It is time to make the case for the least worst tax.

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