Why it’s right to keep it in the family
At the October 2007 party conference, George Osborne announced that, if made chancellor, he would cut inheritance tax. The announcement was wildly (and to some, unaware of the polling, surprisingly) popular. In the weeks before the speech there was quite an argument among Tory modernisers about the rights and wrongs of it. So at the end of August I weighed in with this.
I’ve been wondering when I should start worrying about inheritance tax. I could wait until after I am dead, I suppose, when the bill arrives. Or I could start now. After a bit of thought, I’ve picked now. When you are alive it’s easier to express yourself clearly, I find.
My choice may seem a no-brainer to you, but it will have taken the Government by surprise. Ministers expect me to die first and worry later. That is the only explanation I can think of for their constant repetition of their favourite inheritance tax statistic. What are you getting so worked up about they ask. Only 6 per cent of all estates will have to pay inheritance tax. You’re off the hook.
And, of course, they are quite right. Last year inheritance tax was, indeed, paid on only 6 per cent of estates. The Government keeps increasing the threshold (the amount below which you don’t have to pay), and says that it intends to carry on doing so. It says it will do this rapidly enough, as fast as house price inflation, so that in years to come inheritance tax will still fall on only this small proportion of estates. You see. What’s the problem?
I’ll tell you what the problem is. The problem is that I don’t know when I am going to die.
Yes, it is possible that by the time I die the tax threshold may be so high that my estate is no longer eligible. But it’s also possible that I could die tomorrow, and if I did my estate would have to pay tax at existing rates and the existing threshold.
This explains the discrepancy between the small number of estates paying the tax and the potency of the issue. According to research by Scottish Widows, 37 per cent of households now have an estate with a value above the threshold. Every one of these people feels themselves an inheritance taxpayer even if only a few of their estates will ever pay. The Government expects people to shrug off the tax because years later they will discover, upon dying, that everything was fine, after all.
So the tax on inheritance raises a relatively small amount of money (£3.6 billion) from a relatively small number of people while making a big impact on the behaviour, plans and fears of a very large number of people. Not an ideal combination.
Now I know the response to this. It is that the people who own estates aren’t really the taxpayers at all. The burden falls on those who inherit. I can spend all I like of my own money and I won’t have to cough up a penny. Sure, if there’s anything left, my children will have to pay. But why shouldn’t they? They’ve done nothing to deserve the cash. They’re lucky to get anything.
This argument seems so obvious and strong that those who deploy it are, I think, baffled that everyone doesn’t simply agree. The case for inheritance tax isn’t simply left wing – it redistributes wealth – but also right wing – it taxes dumb luck rather than meritorious effort, and doesn’t really distort the economy because those who earn the money don’t pay the tax.
Which is pretty powerful, except that it ignores human nature.
Most parents do not think of their children as just another set of economic actors. They look at them as an extension of themselves. They don’t think just of their own interests but how it will affect their family and future generations. And a good thing too. The purpose of public policy should be to encourage this spirit, rather than to undermine it.
The idea that when you tax the passage of wealth from one generation to the next you are not taxing useful economic activity is simply wrong.
In a brilliant speech entitled ‘The Clash of Generations’, delivered a couple of years back, the Tory MP and thinker David Willetts argued that, while all our debates on fairness concern social class, the big issue of the future is equity between generations.
Our welfare system rests on the willingness of one generation to support the other at different stages in the life cycle. The pensions of today’s pensioners are paid for by young earners, and this burden will increase with demographic change. Yet this willingness could be undermined by a perception that the young are getting a raw deal. As the baby-boomers reach old age they will do so having benefited hugely from the house price boom, while their children struggle to get on to the housing ladder and achieve a similar standard of living to the one they grew up with.
The transfer of assets from one generation to the next is one of the ways that the delicate social pact between generations will be maintained. It may not be a redistribution from rich to poor, but that’s not the only kind of redistribution that matters. Inheritance is a redistribution from old to young. And beyond that, the idea that the family’s wealth stays in the family is one way that we signal the obligation that the past has to the present and the present has to the future.
Perhaps you don’t think such signals matter? Well, in the debate on the environment we are constantly being encouraged to think of those who will inherit the Earth. What sort of planet, we are asked, will our children, our grandchildren, live on?
What if I were to reply that it didn’t matter? That I’ll be dead by then and the state of the Earth my children inherit is just dumb luck? What if I were to reply that the economically rational thing to do is to refuse to pay out to prevent climate change because an entirely different set of people, my children not me, will suffer from any consequences?
It’s easy from this to see that in the long run we’re not all dead. We live on in future generations. And if I am expected to think this way in respect of the environment, then I should be allowed to think this way in respect of my estate.
And when you think about it like this, what could be more natural than to abolish inheritance tax and raise the money instead from the myriad ways that we pollute the Earth?