The Estate Tax: a British perspective

One of the joys of trolling the internet is finding serendipitously a well-written piece that makes some good points in a way that hasn't been so refreshingly stated before.  I consider the post on "Bad Conscience" about the inheritance tax to be such a piece.  The Fairness of Inheritance Tax, Bad Conscience, July 1, 2009.

Here's an excerpt:

The bequeathing of wealth, property, money etc creates imbalances in society. It results in some people – those who had rich parents – having more than others. In this world, having more property, wealth and money means (generally) having an easier, better, less stressful and more pleasurable life.  That, after all, is why people usually want money, property and wealth.  However (as Tim Horton explained on Newsnight) at present in the UK the top 50% of people own 93% of the wealth, and the bottom 50% own just 7%. That’s some serious inequality.  So point number one: allowing unmitigated inheritance tax can only reinforce this inequality.

***

[Let's] turn to fairness .... It is a simple, uncontroversial fact that nobody deserves to be born to their parents. I no more deserved to be born to my middle-class, financially prudent and well-employed parents than Joe Bloggs deserved to be born to a single mother on a sink estate. That’s because birth is a lottery – nobody is responsible for who their parents were.  So the brute fact is, nobody deserves to inherit money from their parents. Why? Because it is a fact of arbitrary chance that somebody was born to parents able to leave them large sums of money, rather than financially imprudent parents leaving nothing but debts.

***

But that’s not the end of the matter, for there is more to politics and the settling of social distributive questions than just the issue of who deserves what and whether or not distributions are fair. Here we must remember that the anti-inheritance tax proponents have a strong case when they say that leaving an inheritance behind is important to the lives of parents and children.

***

These two things need to be traded-off against each other. The state can correct for the first by taxing inheritance. This adjusts for the unfair reward of material distributions allocated by the lottery of birth, and can be used to compensate those who were unlucky enough to be born to parents who couldn’t or didn’t leave them an inheritance. This is fair because receiving inheritance and the accruing benefits is itself fundamentally unfair.

However, the state must recognise that leaving inheritance is important to peoples’ lives. Thus the state must certainly not impose a 100% inheritance tax: people must be allowed to leave something to their children, if their lives are going to go well.

The real question is therefore where to draw the line between these two competing demands. How much unfair, undeserved social and material inequality are we prepared to allow in the name of allowing people’s lives to go well by leaving inheritances for their children?

The author suggests that the current 325,000 pounds (in the UK) is too high.  So I'm sure he would agree with my suggestion that the proposal for a $7 million exemption for US couples is way beyond the appropriate threshold, as is a rate of tax of only 45%.  Congress needs to consider these kinds of arguments in dealing with the estate tax and maintain a lower exemption and a higher tax rate over the long term.

(hat tip to the Tax Justice Network, which had a piece linking to this posting.  The Tax Justice Network is a new addition to my tax blogroll, at left.  It was founded by a variety of groups, including our own Citizens for Tax Justice.)

Comments

[Roger Chittum]

A small amount of parental wealth bestowed on children and young adults, usually during the parents' lifetimes, gives the children a chance to realize their potential. An intermediate amount of wealth transfer gives the children lifetime financial security--in other words, the ability not to realize their potential or to be comfortable if they happen to be lacking in talent. A large inheritance transmits power over others in the same way that feudal lordships were heritable. A democracy can certainly tolerate the first and probably the second, but not the third. Warren Buffett had it just right when he adopted an estate plan that makes his family comfortable and financially secure but did not pass on to them the power of his vast wealth.

[Paul Sagar]

Thanks very much for the link, and the kind review.

I would certainly agree with your suggestion that the proposal for a $7 million exemption for US couples is way beyond the appropriate threshold, as is a rate of tax of only 45%.

And yes, Congress - and all elected governments - need to consider these sorts of arguments.

These sorts of arguments, incidentally, not being mine at all. I took them directly from John Rawls, Ronald Dworkin, G.A. Cohen and other political philosophers of recent years. The academy is coming up with good stuff - the politicians should take heed.

[LindaMBeale]

Hi Paul, and welcome to ataxingmatter.

Yes the academy has been talking about fairness for quite a while (and inequality and democracy). One of the problems in the US, I think, is that many people hear only snippets of arguments in poor news programs and poorer-still opinion shows (think Sean Hannity, Rush Limbaugh, Bill O'Reilly ...). so they are adept at mimicking back the right-wing snippets of arguments, and haven't really thought through to understand the genuine issues. I hope things are changing. But I still see too much knee-jerk responses along the lines of "I earned it, it's mine, if the government takes it it is theft".....

[LindaMBeale]

Hi Roger--agreed. No one is talking about confiscatory taxation of estates, and we should be able to agree on a reasonable amount for parents to leave to children (or spouses to each other) that allows them to benefit from their parent's hard work without re-creating feudal societies where a few lords and ladies lived "noble" lives and everyone else served them as peons in relative poverty.

[Jack]

Why would we expect any reasonable legislation in regards to estate taxation when such a large number of our legislators are very wealthy and not likely to vote against the personal well being of their own future heir?

That being said, why is there a need to discuss some special structure and rate related to tax on inheritance? Is it not a form of income? At one moment you didn't have the wealth represented by an inheritance. At the next moment, au revoir dear benefactor, you were that much wealthier. That sure sounds like income to me. What rationale is there for it not being taxed as income? If I win a lottery prize do I not pay standard income tax on that? They're both income resulting from a sudden win fall.

Is it really different because the benefactor in some way owes me the money? Is inheritance from a parent different from such from a friend? The family farm, the usual canard, isn't a family asset. It belonged to pops. If the kids are entitled to own it when pops is gone why didn't he give them a share over time?
Estate tax "relief" is BS. Just another means for those with too much to avoid paying their fair share.

[Charles]

Good social arguements and I agree, in fact the $7 million estate exclusion is lower than I've been hearing. I thought it was going to be $10 million. But within this worthy debate you seem to be forgetting The Golden Rule.

"Those that have the gold make the rules."

[Cecil Macdonald]

Reading this, and the purported logic behind it, makes my head hurt. It is akin to reading an essay written by an armed robber who is attempting to justify his robbery by noting that his target has "too much" wealth and the robber is better served by liberating some of it for himself.

The death tax has nothing to do with social justice. The wealth belonged to the bestower, and it is their will, and their will ALONE, that should determine how that wealth is allocated. The sole role of the state should be to ensure that that bestower's will is followed exactly, and the State should have no interest whatsoever in taxing even a minutia of this wealth.

[Laurent GUERBY]

Cecil Macdonald, it is the employer "will ALONE" to pay his or her employees salaries, yet the "State" tax those salaries as income. Why should it be different for estate?

One lead not explored here is allowing a relatively lower estate tax on periodic during life donations to heirs - compared to the at death tax rate.

The reason is that this donated money is more likely to be partly consumed rather than accumulated on financial products.

As for levels, why not use a formulae involving the average 10 years risk free rate and minimum income (or minimum taxable income if minimum income doesn't exist).

[Jack]

Cecil,
Sorry to break your bubble, but the "death tax" reference isn't even close to accurate. The tax is applied to the inheritor, not the dead guy. It is income to the inheritor ergo the income tax. "But my children are entitled to my wealth," you say. Then why weren't they entitled to spend it as they pleased before you crocked? Are you required to designate an heir to your wealth? Of course not. That's why your wealth is income to your heirs, ergo income tax.

The state has an obligation to assure that your will is probated in accordance with your wishes? Good point. Your heirs benefit from state intervention on their behalf, ergo tax on the income. You are one strange dude, expecting something for nothing. Money transferred from one person to another is income to the latter. Sometimes the state will allow one to call it a gift. Still it is subject to a tax. Transfer the wealth of your estate gradually while you're still alive. At least you'll see the smiles on their faces rather than their look of satisfaction when you're dead. But that means that they'll face a tax on the transfer of said wealth which you can designate as salary if they work for you, or you can call it dividends if you've given them equity participation over time. It's still a form of income.
You see Cecil, when one gets money that they didn't previously have it is regarded as income, whether they had to work for it or not, ergo as income it is subject to taxation.

[LindaMBeale]

Cecil, yours is the kind of comment that shows how well the right-wing propaganda on the taxation of estates has worked. 'Wealthy people,' the propaganda says, 'worked hard for their wealth and it has been taxed in their lifetime, so they should be able to do whatever they want with it to bestow it at death without the state having any right to a say at all.' There is really not a shred of truth in any part of this propaganda.

Generally speaking, wealthy people haven't worked hard for their wealth. Many inherited it in the first place. Much of it has been retained, compared to that which a salary-man retains, because of the influence of the owners of capital on the tax laws which they have succeeded in getting to tax their capital income at less than half the maximum rate assessed on the compensation income of those who work for a living. Much of the income of the wealthy who do get a salary is "fake" compensation--it is really a reward for the status they hold, and not for the work they do, garnered through a buddy "scratch my back, I'll scratch yours" system among directors and CEOs that has moved the pay of CEOs from about 10-20 times that of their average worker to about 400-500 times over the few decades when Friedmania/ reaganomics has reigned in the US economy. And much of the wealth of these wealthy estates has either escaped taxation altogether or been taxed at a pittance of the rate that ordinary Americans pay in payroll and income taxation, resulting in hardly taxed inheritances that are stepped up in basis, delivering tax-free appreciation to the heirs; inheritances that were processed through clever estate planning that claimed the value was a mere fraction of its actual value with artificial restrictions on transferability and similar devices; and estates that had only been subject to capital gains taxation--which never applied to the bulk because the owner was able to monetize using the estate as collateral and hold on til the heirs got the step up in basis at death, etc.).

The state makes the accumulation of wealth possible--try to accumulate wealth by inheriting and investing in a chaotic country with no stable rule of law or sustainable market or other economic system! And a democratic state has an interest in what happens to that accumulated wealth when the person who accumulated it is no longer around to consume it. In particular, it has an interest in preventing the development of oligarchy.

Taxation is not robbery. Your views on that echo the anarcho-liberatarian rage of those who think they are justified in killing anyone who encroaches on "their" property, as they define it. They are the most selfish of all. They take from the state from the day of their conception, but they never acknowledge their debt and they do everything they can to avoid paying it. They don't make good citizens. And I wouldn't want to have them as neighbors.