Praesidium

Sunday, August 20, 2006

Inheritance Tax

Stephen Byers writes here that the next Labour PM should abolish inheritance tax. (Reported in the Telegraph itself, and by the BBC)

Bush has already done something similar in the US, as chronicled in Gaertz and Shapiro's book Death by a Thousand Cuts.

It seems a strange move. Relatively few estates (just 6% last year) are affected, and it's clearly a progressive tax. It's puzzling why the focus is on this, rather than other taxes with more wide reaching effects.

Byers stresses a concern with the burden falling on those who only own a family home. Perhaps this taps into traditionally English concerns ('an Englishman's home is his castle' after all). I'm not sure this is necessarily problematic, however, if the home's worth that much - either the family in question have thereby done well for themselves or benefitted from the windfall of rising house prices (a capital gain). Moreover, it seems if this was a concern then the remedy might merely be to raise the threshold or lower it combined with an exemption for the family's primary residence.

He also wants to portray the tax as one that hids hard-workers, but that relies crucially on seeing it as a tax on the dead, not those who inherit - who merely benefit from a lucky windfall. The same story happened in the US. Estates tax was seen as hitting small family businesses, rather than merely depriving the Paris Hiltons of our world of their undeserved fortunes.

Of course, while some have proposed very significant restrictions or taxes on inheritance - e.g. Ackerman and Alstott propose its extensive use, albeit it to finance a universal capital grant that gives everyone a start in life (see my review here). I think there are powerful arguments against such measures, principally based on disincentives. (Rawls might allow inheritance if it served to promote the position of the worst off, without violating fair equality of opportunity; while Hayek explicitly argues that if barred from leaving wealth to their children parents might do worse to favour their offspring, so we are better harnessing the natural instinct).

I think Byers may have done some good raising the issue for debate, and there may be plenty of tinkering that could be done (e.g. to thresholds), but I'm opposed to any out-right abolition of the tax.

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