Inheritance Tax: Why We Don’t Like It, but (Rationally) We Should

Inheritance Tax: Why We Don’t Like It, but (Rationally) We Should April 28, 2018

Inheritance Tax. People love to hate it, but we shouldn’t.

Let me remind you of an earlier piece before taking it on.

I have not particularly studied anything about Inheritance Tax (IHT), so this is coming purely from my own thinking about this. Yesterday, the Daily Mail predictably spouted off about the Labour Party’s designs on IHT:

Corbyn’s sly death tax trap: 1.2million more families’ homes to be hit by Labour’s plan to slash inheritance rate to £650,000

Lovely language. The right always seem to want to protect inheritances. Once we look at what they are, we might understand why, and then we can see if they are incoherent with other ideals that the right, for example The Conservative Party, might have.

Here, inheritance is the passing on of material wealth to one’s offspring (or some others of choice). Let’s simplify it to one’s offspring for sake of argument, and let’s not consider donating to charity here.

A person might work really hard all of their lives and earn, through merit, a large sum of material wealth. They might, on the other hand, inherit a large amount themselves, and use this to maintain their richness. Let’s take the first case.

Let’s take the first case. Here, someone has merited the wealth they have earned. Perhaps they have worked really hard, had great ideas, invented some stuff, or whatever. We can assume they genuinely merited getting this material wealth. Let’s look at what present Conservative PM, Theresa May, recently said:

When I stood in Downing Street as Prime Minister for the first time this Summer, I set out my mission to build a country that works for everyone. Today I want to talk a little more about what that means and lay out my vision for a truly meritocratic Britain that puts the interests of ordinary, working class people first….

I want Britain to be the world’s great meritocracy – a country where everyone has a fair chance to go as far as their talent and their hard work will allow.

I want us to be a country where everyone plays by the same rules; where ordinary, working class people have more control over their lives and the chance to share fairly in the prosperity of the nation.

And I want Britain to be a place where advantage is based on merit not privilege; where it is your talent and hard work that matter not where you were born, who your parents are or what your accent sounds like.

Let us not underestimate what it will take to create that great meritocracy. It means taking on some big challenges, tackling some vested interests. Overcoming barriers that have been constructed over many years.

Strong words, indeed. It all sounds wonderful: people should be able to merit and aspire to material wealth, through “talent and hard work that matter not where you were born, who your parents are or what your accent sounds like”.

This should come back to haunt May. It won’t, but it should. Because it is utterly at odds with her and her party’s views on IHT. The Tories have been planning to cut IHT to the tune of £1billion to the public purse. Jeremy Corbyn’s Labour plan to reduce the threshold on IHT.

So what is IHT? Well, it is the government, like any tax, getting their hands on hard-earned money for the benefit of everyone in society.

401(K) 2012
401(K) 2012

But what is the real point, philosophically speaking, of IHT? Well, I see it as a redistribution of income that balances the equality of opportunity for individuals in a country.

Take this as an example: I have two million pounds and I walk down the street and find two children, I randomly select one child and give the money to them and say, “There you go here is some money to give you a leg up in life.” To the other I say, “Tough luck, mate.”

Would the second child feel justified in this being unfair? Yes, by the notion that the first child did nothing to merit being given that money: they received it on point of fact of luckily being in the right place at the right time. This child then has the privilege of having money, through no merit, and has a much better chance of succeeding in life than the second child.

Let’s apply this analogy.

One child is lucky to have been born to parents with money. The parents die and that child inherits the wealth. Through no merit of that child, they are privileged over an above the next child who is born to poor parents. It is the parent(s) who merited that wealth, not the child (and if it was old money, then they would not have merited it either). What inheritance clearly does in maintain privilege. Very clearly. That privilege is assigned on the luck of birth.

What IHT does is try to reduce the privileged playing field and reassign wealth to the rest of society to give its members equality of opportunity (I would argue that income from IHT should be used to explicitly do this rather than be directed into the general government coffers).

When you see Theresa May’s words that meritocracy should reward “talent and hard work that matter not where you were born, who your parents are or what your accent sounds like”, then you can quite obviously see the blatant contradiction in ideals with IHT and meritocracy – they are diametrically opposed.

The Conservatives, though, are a party full of old money and inherited privilege, so this comes as absolutely no surprise.

The reason why inheritance tax is so unpopular is that when we project into the future, past our death, we still imagine ourselves being alive in some way. This is evident when we look at what goes on in our minds. We say something like, “That’s my money and I don’t want the government getting their hands on it.2 Let’s park the baggage about the notion that the government here appears to be inherently evil and shouldn’t be using “our” money. What is happening is that we see ourselves as still existing past our deaths such that the money remains “our money”. No, you are dead. You do not exist. You will own nothing because there is no “you”. There might be an estate of sorts, but you don’t own anything. What we generally desire to happen is our collected wealth transfers to our offspring. This is all rather natural and can be well explained in evolutionary terms.

We need to stop thinking people are directly stealing stuff off us as if we are alive. Accept death and try to look at society more objectively.

That’s a really tough ask because we would all want to make the ones we love as comfortable as possible.

Okay, so do that when you are alive.

Yes, we naturally want to give our children a leg up in life by passing on what will become a privilege for our children.

Now imagine being a parent of children in a really low socio-economic scenario. You, hopefully (but not necessarily) want the best for your children. You may or may not be highly aspirational. But, rationally speaking, you would surely want a helpful leg up for your children so they could at least compete on a level playing field against those around them? Surely everyone can see that an unfair playing field for any given child is inherently unfair and has nothing to do with merit. People don’t merit being born to any given scenario. An unborn/yet-to-be person cannot have merit.

An objective outsider would, I posit, argue that all children should have equality of opportunity.

And this is what inheritance tax seeks to do, and should certainly be what the funds raised are explicitly put towards achieving.

The OECD recently advised that IHT should be used to tackle inequality. The Guardian reported on this as follows:

Governments should consider deploying the taxation system to reduce wealth inequality, with inheritance tax the favoured route, according to the west’s leading economic thinktank.

Wealth inequality is greater than income inequality and evidence suggests disparities have increased in recent decades, the Organisation for Economic Cooperation and Development said in a report. Wealth – such as property, savings, share portfolios and pensions – grows and becomes self-reinforcing because the rich have more to invest in higher-yielding assets, greater financial knowhow and better access to investment advice, the OECD said.

Rich people also have more power, influence and opportunities and are able to generate income without having to work. Someone working for €20,000 (£17,300) a year and another person making the same money from an investment are in different positions, the report, The Role and Design of Net Wealth Taxes in the OECD, said.

“A key aspect of wealth accumulation is that it operates in a self-reinforcing way; wealth begets wealth,” the report said. “It may be argued that wealth begets more power, which may ultimately beget more wealth. Overall, this means that, in the absence of taxation, wealth inequality will tend to increase.”…

Increased home ownership and rising house prices mean the wealth of younger generations now depends more on how much they inherit, increasing inequality. Inherited wealth is also unearned and therefore unfair, the report said.

By accepting the argument for tougher wealth taxes and proposing inheritance tax as a key measure, the OECD is likely to stir debate in the UK, where the tax is highly unpopular. Inequality between the generations has surged, but most married couples can leave up to £850,000 to their direct descendants without paying inheritance tax. That figure will rise to £1m by 2020.

Laura Gardiner, principal researcher at the Resolution Foundation, a UK thinktank, said: “It’s very useful that the OECD has published this analysis. The broad thrust of the argument is very sensible. Wealth is much more unequal than income but we talk about it much less.”

She said politicians on the left and right recognised that taxing wealth would be necessary as more baby boomers, which typically refers to the generation born between 1946 and 1964, retire and need social care. The 40% rate for UK inheritance tax scares people even though only 4% of estates pay any inheritance tax, she said.

We need to think socially and not individually if we are being rational about what we would like society to look like. Do we want a society that is fair, or one where randomly selected people are given privilege with no connection to merit?

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