For an Inheritance Tax

Chris Dillow:

For an inheritance tax: The news that David Cameron got £500,000 tax-free from his parents raises the question of how or whether inheritances should be taxed. My view is that they should be, and heavily so.

Certainly, a lot of the defences of inheritance look pathetically weak. For example:

“Because a parent’s income was taxed, taxing inheritances is a form of double taxation.” But the same is true for most incomes. When people buy the Investors Chronicle – thus handing money over to me – they do so out of taxed income. Should I therefore escape income tax?

“People should be able to provide for their kids.” Most recipients of inheritances, however, are middle-aged. And the prospect of a big inheritance can actually damage offspring, by reducing their self-reliance and incentives to work and save. …

“Inheritance tax punishes aspiration.” In most cases, though, the aspiration is an illusory one. HMRC data show that of the 279,301 estates that were left in 2012-13, a mere 6.4% attracted tax. Even if the IHT threshold were greatly reduced, only a minority would pay it.

This, though, brings me to why I favour inheritance taxes. … We should think of every penny of inheritance which is not taxed as a penny which has to be raised from income taxes. Low inheritance tax thus means high income tax. From this perspective, those who want tax-free inheritances are exactly like benefit scroungers. They want something for nothing at the expense of hardworking tax-payers. It is, therefore, the lack of a serious inheritance tax – and thus the higher taxes on workers, savers and entrepreneurs – that is truly an attack upon aspirations.

If – as I find plausible – the prospect of getting an inheritance reduces labour supply, then optimal taxation might require big inheritance tax rates; these might be less distortionary than income taxes. …

Surely, there is something fundamentally unjust about being able to get £500,000 tax-free from not working, when the same sum obtained by work would be heavily taxed.

I suspect opposition to sensible inheritance taxes owes more to the rich’s colossal sense of entitlement than it does to justice or economic efficiency. …