Following Philip Hammond’s budget last week, there was a flurry of opinions about what he should have said. One of the most popular suggestions was that inheritance tax should have been increased and that HM Treasury should have introduced new methods aimed at taxing a person’s wealth, as opposed to their income.
These arguments often sound persuasive. Surely it is acceptable to tax the estates of the very wealthy? Lots of these people haven’t become wealthy by working hard, they have just accumulated their wealth by luck and speculation.
But we would be wrong to focus the Treasury’s attention on wealth. What’s more, any attempt to increase inheritance tax or to widen its scope would be misguided.
Inheritance tax should be abolished for a number of reasons.
First, it undermines private property rights. From Aristotle’s Politics to John Locke’s Two Treatises of Government, and Robert Nozick’s Anarchy State and Utopia, history’s greatest thinkers have defended and celebrated private property rights. Inheritance tax erodes this most basic and fundamental individual right.
“Let’s talk of graves, of worms, and epitaphs, make dust our paper and with rainy eyes write sorrow on the bosom of the earth. Let’s choose executors and talk of wills. And yet not so, for what can we bequeath save our deposed bodies to the ground? Our lands, our lives, and all are Bolingbroke’s, and nothing can we call our own but Death.”
Thus, according to Shakespeare, lamented Richard II when he ceded political control of England to Henry Bolingbroke. The deposed monarch was despondent, as he realised that everything he had owned was no longer his. Inheritance tax does the same to us. It means that property is not ours to dispose of as we see fit, but rather the possession of the state.
This brings us to the second negative aspect of inheritance tax. It goes against our most fundamental desire to provide for the next generation. It cannot be right that somebody works hard all their life, saves their money, and makes wise investments, only to see a significant proportion of that money going, not to their loved ones, but rather to the state.
It is also a deeply cruel tax. It hits people during the most vulnerable times of their lives – when they’re dealing with the loss of a close family member. While a bereaved relative is dealing with the emotional trauma of losing a loved one and organising the funeral, and while friends and relatives are sending flowers and condolence cards, HMRC sends a bill.
Inheritance tax is also incredibly unfair. Not only is it taxing the same assets twice, but it is also avoided by the super wealthy who can afford to pay expensive lawyers and accountants to set up trusts. It falls on people who, although they may have some wealth, are by no means very wealthy and who cannot afford the means to avoid paying it.
While it’s by no means the most economically damaging tax on the books, it still has negative impacts on the economy. It discourages investment, meaning that economic growth is stunted.
Then there is its cost-effectiveness. It costs a great deal of money for HMRC to assess the estates of the deceased in order to ascertain whether or not they are liable to pay inheritance tax. This is in contrast with the modest amount of money that it brings in for the government’s coffers.
Those who attempt to defend inheritance tax are quick to point out that it exists to reduce inequality. They are wrong to do so. The UK has a relatively progressive tax system in which the highest earners are taxed more. The revenue raised is quite rightly redistributed in order to help the less fortunate in society and to also ensure that there is true equality of opportunity, in areas such as education, for example.
Moreover, inheritance tax is a solution in desperate search of a problem. The number of self-made billionaires rises every year, whereas the number of billionaires and millionaires who inherited their wealth is at the lowest point ever. One only has to read the Sunday Times Rich List each year to see this in action.
Inheritance tax is unfair, cruel, economically damaging, and inefficient. It should be abolished.
Now, let’s turn our attention to wealth taxes in general. Should we, as suggested by groups such as the Institute for Public Policy Research, move towards a system of taxing wealth, including replacing inheritance tax with a tax on lifetime gifts?
The answer is no. Although the IPPR is right to point out the issues surrounding inheritance tax, they are wrong to say that it should be replaced by a tax on gifts. The enforcement costs and the logistics of such a policy would be high, and easy for the wealthiest to continue avoiding. What would HMRC do? Send someone around to the homes of everybody in the country on Christmas Day just in case Grandpa decides to be too generous?
Proponents of wealth taxes often frame it in language that suggests there is something unjust in accumulating wealth. They point out that these people do not deserve to keep the wealth, as they haven’t earned it themselves. They have become wealthy, not as a result of their hard work, but purely because their house has increased in value.
Although it is certainly true that many people find themselves classed as wealthy due to the value of their house, this is hardly their fault. The reason why houses are so expensive in this country is due to the excessively restrictive planning system. This has meant that supply has not kept up with demand, and so house prices have increased as a result. What’s more, those who try to sell their house are punished by the government in the form of stamp duty, and capital gains tax for other property too. It is, therefore, blatantly wrong for the government to tax people who have become wealthy as a result of the failure of the state.
Furthermore, all this talk of “deserving” is deeply sinister. Who gets to decide whether people deserve their wealth or not? The country? The government? The media? The antisemites who are currently infesting the Labour Party? Once we start asking who deserves their money, we are in unsettling and dangerous territory.
There is, of course, also the very important fact that wealth taxes simply do not work. Many countries around the world have recognised this and so have moved away from taxing wealth, so for the UK to move in the opposite direction would be a retrograde step. When France increased its wealth tax, the economy took a hit, the most productive people in the country fled, taking their money with them, and London became one of the biggest French cities.
Our tax system certainly needs reforming. It is too long and complicated, with loopholes that allow the very wealthiest to avoid paying, while it punishes the most productive people in the country, and hurts the poor. We need a tax system that encourages investment and growth, improves living standards, and raises revenue so that we can provide quality public services such as healthcare and education. A wealth tax would achieve the very opposite.