Inheritance Tax again
Why does it arouse such anger? The principle seems sound - tax mostly unearned inheritances rather than productive work. It is one of the easiest to pay, as it is levied as a % of money you are about to receive - not say like council tax. But in any case, most people don't pay it (about 5% of estates paid it in the latest available year, 2004/2005), and most people will never pay it if present trends persist (the rate goes up, house prices are likely to stagnate).Many explanations can be easily dismissed. That it could be because they think (wrongly) they are going to pay it, or because they expect to pay it, much like people put their income in much higher bracket than it really is. Yet today's Mail on Sunday has a poll which puts paid to this line of thinking:
Only 20% say they would expect to inherit enough to qualify for inheritance tax at its present threshold of £300,000. And only 33% expect to leave enough money to make their children liable to pay death duty.
Given people must know the threshold will increase in 10-50 years before they die, this last figure must actually massively over estimate those who even think they will pay it. And yet the article says 71% welcome the Tories' proposal. It is also suggested that this issue is more salient in Britain than in many countries.
Another often heard suggestion is that people resent double taxation, i.e. the money has paid income tax when it was earned, and then again when it is disposed of. That this only applies to the dead person, and also that much of the concern is said to be highly inflated house prices, which of course weren't taxed, are factors to consider here. But more importantly, people don't seem to get so upset about double taxation that affects them every day, most noticeably VAT on expenditure funded by income that has been taxed. I think I even saw a poll that said people would prefer a cut in inheritance tax that won't benefit them even if it means a rise in VAT which will hurt them.
Is it the rate then - at 40% -- seen as simply too high? I find this a little hard to believe too given people seem to think its fine that higher-rate taxpayers pay that marginal rate on productive work, or at least if not 'fine' then there is not a huge campaign to get it reduced.
It must then, I think, be something to do with the nature of inheritance itself, an d as such although it won't affect most people much, and they realise that [1], they simply don't believe inheritance per se should be taxed. The most obvious explanation here is that it is a rare example of inter-family transactions on which tax is paid. The same would be true if your father employed you, which doesn't seem to be such an issue, but that is pretty rare. Nevertheless again I'm a little sceptical to this as an explanation as Britain hardly has the most close of family ties. The Daily Mail not only wants no inheritance tax but it also wants the state to pay for nursing care for people's parents, so 'they don't need to eat into their savings'.
I think for the inheritors it might have something to do with a British love of a "freebie", the idea that if you can get away with doing no work you should do no work. For many people their parent's house has risen in value far more than any savings they could ever hope to accumulate. This idea is boosted by the fact that many of the people who get most exercised about inheritance tax always strike you as the ones who aren't going to make the money any other way [2]. Maybe those who aren't going to benefit still enjoy the thought of others' doing so. Yet I don't really know if this is a particularly British characteristic, and if it is one that is strong enough to outweigh the other factors, or what those who have money to leave get out of it.
Unfortunately the case is probably lost. Will Hutton has a go here, and his arguments are sound, but even he somehow seems to have decided it is a tax the poor pay (his figures seem all screwy).
[1] Although I have doubts people realise the tax is 0% rated below £300k or thereabouts and tax is paid only on the balance - as two people I know who have financial-related jobs didn't know this.
[2] This would fit in with Tim Worstall's argument, that inheritance is good for social mobility because the children always fritter it away.
Labels: Taxation
posted by Matthew @ 10/08/2007 07:13:00 AM
Comments: 7
