Listen to Adam Smith

HJ

I agree with much of Irwin Stelzer's argument, but he is surely wrong to say that inheritance tax, in the form it is currently levied in the UK, is not a death duty. He claims it is paid by the inheritor - as if there is and could be, only one inheritor.

In fact, inheritance tax is paid not on the amount that an individual inherits, it is paid on the size of the estate of the deceased. So the same amount of tax is paid whether or not the estate is split amongst many people or just left to one. So tax may be deducted even if individuals are receiving very modest amounts.

The correct apporach, surely, is to abolish inheritance tax and to require the individual inheritors to pay capital gains tax on inherited wealth. This would encourage people to spread money around in their will.

But, of course, the real purpose of inheritance tax is to feed the insatiable demands of the state.

cuffleyburgers

There is no doubt that some sort of inheritance tax is one of the less damaging of the multiple forms of taxation we are faced with. And your argument would be perfect if the object of the taxation were the beneficiary and not the estate itself. Then it could be perceived as fair. As it is, and with the limits not increased in line with house price inflation, it was clearly just the usual squalid Labour money grubbing exercise of bash the middle classes.

Mark Kasozimusoke

Dr Stelzer is quite correct about weighing up the merits of providing tax relief and stimulating people to seek employment. However the most recent thresholds for inheritance tax were becoming very close to objectively small amounts of money in comparison to the rising cost of living(especially in South East England where a two bedroomed hovel can cost around £200,000). The figure of only 6% is much quoted but how many years would it have taken for that percentage to have got well into double figures? HJ makes an interesting alternative suggestion. If governments are to retain low thresholds for inheritance tax then as Stelzer points out they should be offering lower, flatter taxes elsewhere. None of the main parties seem committed to flattening tax even for those on low income. Surely a libertarian approach should be to limit the size of the State. Neither George Osborne or Vincent Cable seem to be offering robust alternatives to Brown's persistent theft of GDP. Will any of these leading politicians break rank and offer us some original "free" market policies?

Gavin Kennedy

Quoting Adam Smith on the benefits or otherwise of inheritance tax is not helpful when the context is left unexplained. In Wealth Of Nations, Book V, ii.h.4: p 859, he discusses inheritance tax in his usual manner with a history of such taxes since Roman times. He distinguishes between a tax on inheritance when the children live at home and concludes such a tax would be 'cruel and oppressive'. Again he quotes Roman law and Scotch law for cases where the children are independent and says inheritance would be 'a real addition to their fortune' and 'might...perhaps, without more inconveniency than what attends all duties of this kind, be liable to some tax'. Certainly not 40 per cent (Augustus set it at 5 per cent). Of course, he was not writing when icnome tax on labour can be 40 per cent (it was zero), plus VAT at 17.5 per cent on consumption, plus local council tax, plus, plus, plus. I would not call on Adam Smith as evidence of a ringing endorsement of inheritance tax.

Ben Philips

Sorry Irwin - I don't buy this. Several points: first, even allowing for your theoretical arguments about the desirability of active employment, surely we should be encouraging, through whatever means we can, individuals and families to become self-sufficient. That way we no longer look to the state to keep us in old age, but through what we and our parents have contributed to the family pot. You want a smaller state? Me too. Then abolish IHT and allow families to fend for themselves. And if the unworthy beneficiary blows it all that's his look-out. You suggest that rises in house prices are an unwarranted benefit in kind to the next generation. But even if we do enjoy a windfall on the property of a deceased, it will only buy us an equivalent somewhere else. And with so many struggling to get onto the property ladder, a leg-up from a departed grand-parent could help the third generation. Second: the imposition of IHT cuts right across the family. If I've worked hard and I wish to pass the proceeds of my work onto my children and grand-children, that's my decision. The state should not act as arbiter on what I do with my money. It should allow me the freedom to pass it on untouched by yet further government interference. Third: by removing every justifiable tax grievance on individuals and families we may indeed encourage risk-taking and entrepreneurship from the next generation. I myself stand to inherit a sizeable estate; it is acting as a spur for me to establish a legacy in my own right and not to live off what others have provided for me. And finally we should use the exemption as an encouragement for philanthropy. Freed from the threat of the taxman, we can safely open the door and start giving, safe in the knowledge that this is our decision made for the best of all reasons: pure altruism.

David

I don't care if IHT makes economic sense or not. We own our property and should be free to give that property to anyone we like, tax free, as a gift upon our death. And I question the argument that IHT is good for the economy. Surely IHT discourages people from building up wealth to hand to future generations, as nearly half will be lost in tax? People resent working for the taxman, particularly when older, so they stop. And not all those who inherit fit your lazy stereotype of the 'dim wit son' who blows the family silver. Many people make a lot of their inheritance, turning small family businesses into far bigger ones. It is often the second or third generation that makes it big, as 'the first million is the hardest'. With IHT, these businesses are lost.

Chris

I suspect, if being objective, the concept of inheritance tax is not necessarily bad. However making it fair for all concerned is or should be a worthy goal. The lottery concept of housing valuation does not consider all the issues. Many so-called working and middle class family home owners have spent years of penury paying off mortgages resulting in a lifetime of minimal disposable income, foregoing holidays, new clothes, cinemas, theatres and eating-out. Compare this with either the rich or even renters who seem to have plenty of money for such leisure activities. So seems fair that savers should not be penalised for this gain which does come in the main through sacrifice. A nation of homeowners...and all that! Perhaps a fairer way would be to add an exclusion on a primary residence from the inheritance tax equation and only levy remaining assets. At the same time close all the loopholes on family trusts etc. which are really just for the benefit of the really wealthy to avoid tax. I am sure the economics would be greatly improved too!

Richard Tesh

I totally disagree. I do not consider we are part of the 6% most wealthy in the country and do not think we live in a marginal seat, yet I believe IHT is potentially the most distorting of all the taxes imposed. Taking IHT into account my marginal rate of tax is in excess of 70%, a figure that is readily verifiable. The thrust of the argument does means that when the house is paid for, the kids educated and on the property ladder whilst the pension has been secured, why work when you keep less than 30%? It is as easy for the retired to emigrate and take their money away as it is for the non doms. Furthermore, capital gains tax is now 18% (unless amended) whereas IHT is 40%. So the home is tax at a greater rate than any other capital gain whilst cash and equities, which have already been taxed once, are taxed a second (or more) time. I now spend a significant proportion of my time and energy finding various ways to avoid IHT. It is a real pleasure to consume a bottle of "duty free" knowing that the real cost is only 60% of what I have paid as the Revenue will not be able to steal it back off me.

Peter Taber

The first glaring flaw in Stelzer's argument is the implication that the State has first claim to all wealth. His glib assertion that most wealth is the result of appreciated house prices is unsubstantiated, but who cares? The fact that a family bought a house, then paid their mortgage and taxes over the course of a lifetime hardly disqualifies the family from keeping their putative gains. This is especially true if the property passes from one generation to another. And surely it would be unfair to tax the part of the increase that relates to inflationary government schemes that have eroded purchasing power by debasing the currency. Then there is his complaint that an inheritance increases the possibility that one person in a family might drop out of the labor force is, first of all, none of his business. But, isn't there an argument to be made that we'd be better off if someone was home watching the kids? Stelzer's house of cards rests on the assumtion that a government bureaucrat knows better of how to direct the disposition of a nation's wealth than its citizens. I thought we got past the idea of central planning with the fall of the Berlin Wall, but I guess not. Some bad ideas, zombie like, still wander the streets and clutter the pages of the popular media.

Alan Hill

Very good Mr Stelzer but we all know that politicians do what is good for their poll ratings not what is good for the economy.

Tadeusz Stanek

Is it The Spectator or am I reading the Morning Star or the Guardian? Arguments spurious. Between father and son, no taxman need call. Family is writ in blood, sweat, and tears; economy in ink (if at all).

Steve

‘An inheritance received by a family reduces the probability that both spouses will continue to work, and increases the probability that both will retire.’ Of course it does. But this is only one of the many pieces of evidence that could be assembled. What about those that inherit and, hence, cease relying on state aid. Or those that inherit after retirement (an increasing trend) and thus counteract the great pensions theft. Think also about the alternative uses of the money - upward pressure on house prices, more luxury cars etc. Frankly all this article demonstrates is that you select evidence that most aligns with your preconceptions.

Gene Robison

Stelzer is mad as a hatter.

JackM

So, according to the author, one of the enormous negative effects on society of receiving inheritance is that is takes people out of the labor market. Well, if that is such a hugely destructive problem, then we should end welfare because all those layabouts waiting for free money from the government should be out working instead. I know, it's ridiculous. Irwin, the problems with your "argument" is that you only care about social engineering and you don't seem put off by the negative impact of double taxation (or treble etc). And you seem to imply that the money REALLY belongs to the government anyway, and it is for them to decide how much of THEIR money (that you temporarily have in your accounts) to let you have. Yuck.

jfrancishill

Wealth inherited most often in later years will be invested for support of latter years. Said wealth generates more economic health than it would in the taxman's purse.

wolf terner

It is obvious someone, like the author of this piece, lacks basic knowledge about inheritied monies. Money that is double taxed through inheritance is money wasted by government. It effectively removes that money from the sector that all employed people would earn in their daily jobs.It is money redirected to pet political projects which directs taxed money to limited individuals. Money that is spent by those that inherit it, whether that inheritor works or not is still spent in the public sector. It is taxed, taxed through the purchase of goods necessary to sustain that individual. It is invested by that idividual into businesses that are again taxed by government. And after several generations, with more family members to divided up the inherited monies guess who will eventually have to go to work. Which suggests that the families of the rich keep up the gene pool selection so as to compete in the eventual open market for employees. Market crashes are also great equalizers of wealth.

Philip Ogilvie

With interest rates are as low as they are now, a 10% capital tax set in 1980, say, is like a 20 - 30% tax today, in terms of the number of years investment income needed to recover the loss caused. At 40%, a capital tax is highly confiscatory and unacceptable on legacies of under 300,000 pounds PER RECIPIENT. Looked at another way, the setting of a flat rate inheritance tax by the Conservatives when previously the rate had been tapered, has been a wonderful poison pill to get Labour with.

Knott Byinnit

LOL, it's OK to tax my children because, "in most cases", I didn't earn their inheritance by digging ditches, etc. Well, isn't that logical? I might as well throw out my umbrella because,"in most cases", when I walk outside I won't get rained on, hmm? Besides, only evil, fat-cat entrepreneurs carry umbrellas, n'est-ce pas? Why, we should get the government to take their umbrellas and give them to the needy! Rich people don't care if the poor have no umbrellas. I wish I could find a politician to vote for who would do something about all the hoarded umbrellas in the fat-cat foyers of all these fat-cat mansions!