08 October 2004 Blog Home : October 2004 : Permalink
Harry's Spot has an post about inheritance tax which is just plain wrong. It is inspired by a Joan Bakewell piece in the Grauniad which advocates spending the dosh now rather than trying to find a way to pass it on to the kids or charities after you die. There is nothing wrong with that sentiment but it will not suit everyone. It seems that the desire to provide for ones offspring is inbuilt into human nature and thus we generally like the idea of leaving money to our offsping, nephews, nieces and so on and we dislike being foced to hand over a chunk to the grasping taxman instead.
However Harry's Spot contributor Marcus feels that this is unfair in that it benefits one set of descendants more than others and hence it should be taxed.
There's something about inherited wealth that I find unnatractive on moral grounds and I am in favour - in broad terms - of the idea of Inheritance Tax. Why should an accident of birth perpetuate a lifestyle of riches which a person hasn't worked hard for ? And why shouldn't one of the aims of government be equality of opportunity for all citizens ? If IHT plays a part in this transfer of assets then that's fine by me.
This is completely wrong IMO, why should we effectively punish good parents for their attempts to improve the lives of their children? This piece illustrates exactly why socialism is bad becuase it removes the incentives we have to save and prosper. If we have no incentive to help our children we will not give it to the government but rather (as Joan B says) spend the money now and leave nothing to the government. Then when our children get into a tricky position they have no fallback other than government largesse to tide them over. And of course government largesse will tend not to finance potentially wealth and job creating entrepreneurial activities which would be financed by someone wth a private income.
The next part throws up the rich trust beneficiary as the strawman for those who benefit from inheritance. This is completely bogus in two different ways. Firstly the number of people who inherit sufficient unearned income to live on is miniscule - the majorty of people pass on very little other than their house and furniture and secondly those who look like they will be leaving a big legacy are the ones who work the system so that their legacy avoids as much tax as possible. In otherwords the people who pay IHT are the middle-class suckers not the seriously wealthy.
To look at an example - it is true that selling the house at today's inflated property prices will likely lead to a tidy sum but without skillful investment a legacy of say £250,000 is not going to provide enough to live on (assume two children sharing the inheritance of a £500,000 house). Assuming a 5% annual return and you are looking at income of £12,500 a year. This obviously helps when times are tight but £1000 a month is unlikely to pay the mortgage let alone provide enough to live on. However that £250,000 could usefully help finance expansion of a small business or starting one up and that will help the government more in the long term because it will cause people to pay income tax and VAT and it will reduce the number of people on the dole. If the government gets its 40% cut on the value above £263,000 then the inheritance is reduced to a shade over £200,000 each. In income terms that cut is a straight 20% reduction (or about £200/month) which might not be significant, although for example the difference between £800 and £1000 could be the difference between being able to afford childcare or not. However the £50,000 reduction in capital does make a big difference. £50,000 would (for example) allow a company to buy a van and hire a driver to make deliveries itself rather than paying a carrier and the government would in fact gain quite a lot of that anyway in taxes.
Inheritance tax is a classic case of government intervention to change incentives in such a way that private enterprise has a negative incentive while sponging off the state has a postive incentive. Since the state is, in general, an extremely poor producer of wealth and services in genera this is a bad bargain. According to fellow blogger Tim Worstall it could be even worse if you believe a paper by economist Professor Nordhaus that claims entrepreneurs produce £97.8 of benefit for everyone else for the £2.2 they get themeselves.
I'll close with a thought - historically we look down on graverobbers and their ilk - these days thanks to IHT the government is effectively a grave-robber.