Death and taxes

Political philosopher Martin O'Neill looks at the thinking behind a political issue of the day. In h

In a letter to his friend Jean-Baptiste Leroy in 1789, Benjamin Franklin famously opined that “in the world nothing can be said to be certain except death and taxes.” Franklin was surely right about this, just as his judgment was sound in so many other matters – after all, this was the man who told us that “beer is living proof that God loves us and wants us to be happy”. But it is astonishing how often passions become enflamed, and good sense goes out the window, when we encounter the heady mix of mortality and tax.

Recent events have borne this out. No matter when the next election is held - obviously it's now later rather than sooner - Inheritance Tax (IHT) will be one of the key issues, with Tory plans to raise the IHT threshold from £300,000 to £1,000,000 promising to be their most popular single policy.

David Cameron and George Osborne have found a policy that resonates with the fears and aspirations of many of their fellow citizens, who hold IHT in suspicion and opprobrium. IHT is seen as a despicable “death tax”, which hits families just when they’re down. Moreover, it is seen as especially illegitimate, given that it is a form of “double taxation” (“why should the government take my money, when they already taxed me when I earned it?”).

IHT is viewed as the manifestation of government in its most sinister form: cold and rapacious. But it is actually quite puzzling as to why IHT has quite such a bad image. It’s a fair and progressive form of taxation, that should be popular with both social democrats and free marketeers, for reasons that I’ll explain below. Labour shouldn’t be at all defensive about IHT (and certainly shouldn’t follow Blairite outrider Stephen Byers’s eccentric advocacy of its wholesale abolition), and instead should be prepared to proclaim its myriad virtues from the rooftops.

Here’s why we should learn to stop worrying and learn to love inheritance tax:

(1) Most People Pay Nothing (or at any rate not very much…)
At the current £300,000 threshold, only the richest 6% of estates pay anything. One common form of misjudgement is that many people who will not be affected IHT nevertheless think that they will be. A striking example of this kind of thinking comes from the U.S., where the Estate Tax threshold kicks in only at $2,000,000, or for the top 1% of estates. Nevertheless, Bush’s attempt at repealing the estate tax enjoyed widespread public support among the less well off. Surveys found that 20% of Americans believed that they were in this top 1%, with a further 20% expecting to come into this bracket in the near future!

Even those who fall within the threshold often don’t pay as much as they worry they will. Is Granny worried that her house is now worth £500,000, and the grandchildren are going to lose out? Well, under current rules, Granny can give them £3,000 a year each without any tax implications. Short of liquid cash? Then she can release some of the equity in her property with an equity release mortgage. Moreover, given that the first £300,000 is zero-rated, even if Granny eventually departs leaving an estate valued at, say, £400,000, the tax liability is only £40,000 – leaving a generous £360,000 for the grandchildren. The complaint that IHT stops people from “leaving something to make their descendants lives a bit easier” thus seem rather exaggerated.

(2) Arguments About ‘Double Taxation’ are Bad Arguments:
Perhaps the strangest, and yet most pervasive, aspect of opposition to IHT is that many people say that ‘double taxation’ is intrinsically unfair. But, if this were true, then it would be intrinsically unfair to levy any form of tax on the expenditure of post-tax income. Yet, we pay VAT, fuel taxes, alcohol duty, and stamp duty when we spend our hard-earned cash, without the same kinds of complaints about ‘double taxation’.

This sort of objection to IHT, if carried to its logical conclusion, would preclude the existence of any kind of system of taxation. To see why, just think that any discrete amount of money might be involved in a plethora of separate transactions over time, being subject to different forms of taxation at each point, depending on the nature of that transaction (employing someone, buying a product, bequeathing in a will, etc.).

The ‘double taxation’ argument suggests that, no matter how long this train of transactions, taxation can happen only once in the chain. The idea seems to be that once my money has been taxed once, it cannot be taxed again. Hence, we’d need to know the complete transaction history of the economy in order to know whether any element of taxation was legitimate or not.

This is, I may hazard to suggest, a crazy way to think about taxes. An objection to the aims or level of some tax, including IHT, needs to be made in a way that’s more careful than simply invoking this kind self-defeating ‘double taxation’ argument. The money and property that we legitimately hold is in part defined by, and results from, the operation of the whole complex web of tax rules and regulations.

We can criticize elements of that system, of course, for a wide variety of reasons, but a simple appeal to the illegitimacy of the government expropriating “my money”, simply short-circuits reasoned debate about tax. Yet, this “libertarian intuition”, as philosophers Liam Murphy and Thomas Nagel call it in their book The Myth of Ownership, is pervasive, and difficult to budge. Clear thinking about IHT, as about all taxes, demands that we do budge this ‘libertarian intuition’ aside.

(3) If not Inheritance Tax, then what?
Inheritance Tax is a tax that falls disproportionately on the old (the typical case is of 60 year-olds inhering from 80 year-olds) and the rich. If we wish to repeal it, or raise IHT thresholds, then, unless we want to reduce government expenditure, the shortfall needs to be raised elsewhere. The chances are that it will be raised to a greater degree from those who are younger and poorer than those affected by IHT. Many of the opponents of IHT would be less sure of their position if questions about IHT were framed in a different way. Instead of “Would you like inheritance tax to be reduced?” the question should be “Would you like to replace inheritance tax with increased income tax or corporation tax?”. Here again, thinking of IHT as part of a tax system, rather than in abstract isolation, helps to make the issues clearer.

Cameron and Osborne suggest that their reduction in IHT can be met by levying an annual £25,000 charge on ‘non-domiciled’ UK residents, who pay no tax on their non-UK sourced income. This is a problematic proposal in a number of ways. First of all, one may doubt that it would bring in anything like the £3.5Bn that would be lost by the IHT changes proposed by the Tories. Secondly, many of the UK’s “non-doms” are not Russian oligarchs, or well-paid City workers. Some are simply Polish plumbers, who don’t want to pay tax on their non-UK income. So, some non-doms just could not pay the charge, or would de-register as ‘non-domiciled’ if the charge were imposed. Thirdly, the Tory position seems wholly unprincipled.

Surely either non-doms should pay UK tax in the same way as domiciled tax-payers (in which case we should tax them in the normal way rather than imposing an annual charge), or they should be exempt (in which case current arrangements are fine). It is difficult to see what the justification for the half-way house of a £25,000 ‘residency levy’ might be. Fourthly, let us assume that the Tories are right that we should be doing more to tax non-doms, in one way or another. Well, then, why don’t we do so in order to reduce income tax rather than in order to reduce IHT; or, indeed, why not tax non-doms in order to invest more in health in education? Given these other options, reduction in IHT is not a reasonable priority.

(4) Why Free Market Conservatives Should Love Inheritance Tax
Inheritance Tax is often seen as a policy of the Left rather than the Right, and it’s certainly true that there are lots of good egalitarian reasons that support IHT. But this is only half of the picture. Those on the Right, and especially those who believe in the usual justifications for the free-market, should be just as enthusiastic as the staunchest socialist about the preservation of IHT.

Here’s why. Let us assume that we believe in the glories of the free market economy. If we give people responsibility, and set them on their own two feet, then they’ll work hard and prosper. A free market in trade and employment gives us, let us suppose, a dynamic, innovative and thriving economy. It does this by incentivizing hard work, and letting economic rewards flow to those with the best ideas and the greatest capacity for hard graft.

But, if this is our vision of society, we surely must admit that the unearned windfall gains of inheritance tax distort this picture. Large inheritances distort the level playing field which would allow the dynamic and innovative to prosper. If welfare payments cause listlessness and sap dynamism, then we can only assume that large unearned windfalls will do likewise. Indeed, these were precisely the sorts of arguments given by Teddy Roosevelt when he proposed an American federal estate tax in 1906. As Andrew Carnegie (another proponent of IHT) put it “the parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and leads him to lead a less useful and less worthy life than he otherwise would.” One need hardly point out that neither Roosevelt nor Carnegie were approaching these issues from the left.

The solution? Inheritance tax can be used to fund education so as to create that level playing field and broad opportunities, or, perhaps, used to fund capital grants to young entrepreneurs. This is exactly the sort of scheme favoured by Bruce Ackerman and Anne Alstott, in their book The Stakeholder Society, where they advocate capital grants to each individual of $80,000 at the start of their working lives, funded by a progressive estate tax. One of the interesting features of this sort of scheme is that it is all about using the state to facilitate individual responsibility and to create opportunities, rather than simply doling out welfare. This is a much purer vision of a free market society than societies that are gummed-up and ossified by inherited advantage.

(5) Why the Left Needs To Be Less Defensive about Inheritance Tax
Just like the Democrats in the US, the Labour Party has tended to be somewhat defensive when reacting to proposals to abolish or reduce IHT. Rather than simply emphasizing that not all that many people pay IHT, Labour should be trying the difficult task of transforming public opinion on the issue. Perhaps the strongest arguments for IHT appeals to ideas of reciprocity and fairness that are very commonly shared.

Teddy Roosevelt took the view that “The man of great wealth owes a peculiar obligation to the State, because he derives special advantages from the mere existence of government.” There would be no good in being wealthy if one could not enjoy stable property rights, the protection of the police, and the peace of a well-defended country, all of which need to be paid for. And individuals do not make their money in a vacuum, but by building on a broad history of innovation and development. This sort of reciprocity argument is also made by Bill Gates, Sr., father of the Bill Gates of Microsoft, in his book Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes. This sort of argument can get broad purchase with those of every political stripe, as is demonstrated by the fact that Roosevelt and Gates are hardly “soak the rich” firebrands or loonie lefties.

When one looks clearly at inheritance tax in terms of a concern with fairness and opportunity, it’s difficult to see why it has become so unpopular. Perhaps it is significant that many of those whose families would lose out most massively from a fair system of inheritance tax are precisely those who own some of our most influential newspapers, and who have the spare resources to exert political influence through lobbying and political donations. If so, that gives one more kind of democratic argument for why IHT is a vital policy in a fair and progressive country.

To return from abstract arguments to concrete policies, what should Labour do about IHT, in reaction to the Tory proposals? The answer comes from an unexpected direction. The American philosopher John Rawls, in his final book Justice as Fairness, suggests that a just society should have a system of IHT that taxed beneficiaries rather than estates. In that way, inheritance could be taxed much more like income, and hence inheritance tax could be made progressive, through orienting it towards receivers rather than donors. Large estates need not attract any taxation, as long as they were dispersed among a number of relatively disadvantaged recipients. At the same time, even small estates could be taxed heavily if they were all left to others who were themselves already wealthy. Under this system of IHT, there could be no objection that the state was stopping middle-income families from “setting something aside” for their children. But, at the same time, this form of IHT would prevent wealth-transfers which greatly widened existing inequalities.

Such a system of beneficiary-centred IHT could command easier public support than the existing system, and which would be deeply progressive in its effects. Best of all, under such a revised system, Granny need not worry at all, as she would be free to pass on her estate to her modestly well-off grandchildren (although not, perhaps, to those of her grandchildren who were already millionaires). Recipient-centred IHT would be a system of progressive Inheritance Tax that would be worth having, and worth arguing for. It might also help to undercut some of our common irrationalities about death and taxes.

Martin O’Neill is a political philosopher, based at the Centre for Political Theory in the Department of Politics at the University of Manchester. He has previously taught at Cambridge and Harvard, and is writing a book on Corporations and Social Justice.
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Puffins in peril

Britain’s best-loved seabird is vulnerable to global extinction.

The boatmen helped us scramble ashore and soon there were 50 people wandering on an uninhab­ited slab of sea-battered dolerite called Staple Island. It is one of the National Trust-owned Farne Islands in Northumberland and among England’s most spectacular wildlife locations. There are 100,000 pairs of breeding seabirds here and they were everywhere: at our feet, overhead, across every rock face. The stench of guano was overwhelming.

While the birds seemed to be boundless, the human beings converged on the grassy knoll where the local star attraction resides. It’s the creature that adorns the boat company’s publicity and is emblazoned on the National Trust’s website for the island, the bird that possesses what the poet Norman MacCaig called the “mad, clever clown’s beak”: the pint-sized, parrot-faced puffin.

The British love for this creature is so intense that it is, in essence, the robin redbreast of the sea. Nearly all of its breeding colonies around our coast are tourist attractions. Just across the water, along the shore from Staple Island, is the town of Amble, which holds an annual festival devoted to the puffin. From Lundy in Devon and Skomer in Pembrokeshire to the Isle of May off the Fife coast, or Fair Isle in the Shetlands, trips to puffin colonies are frequent, sometimes daily, events.

“Every tourist shop on these islands sells puffin merchandise – knitwear patterns, tumblers, carvings, coasters, cuddly toys, clothes and, of course, puffin hats,” Helen Moncrieff, the area manager in Shetland for the Royal Society for the Protection of Birds (RSPB), told me.

While the love affair is unquestionable, what seems in doubt is our ability to help the bird now that it is in trouble. Fair Isle once supported a puffin colony of 20,000 birds. In less than three decades, that number has halved. Similar declines have been reported at Britain’s most important puffin site on St Kilda, Scotland, where millions are said to have bred. Now there are fewer than 130,000 pairs, half the total recorded as recently as the 1970s.

The national picture is alarming but the news from elsewhere is even worse. Continental Europe holds more than 90 per cent – five million pairs – of the global total of Atlantic puffins but they are shared primarily between three countries: Denmark (the Faroe Islands), Iceland and Norway. Across this subarctic region, losses have been estimated at 33 per cent since 1979, when monitoring began. But the most striking figure comes from a colony on Røst, Norway, where there has been a fall over this period from nearly 1.5 million pairs to 285,000.

The Westman Islands off the south coast of Iceland hold a substantial proportion of the country’s puffins. Since 2005, breeding success there has been almost nil, and a similar failure has recurred on the Faroe Islands for more than a decade. In both places, where hunting puffins was once a staple of cultural life, catchers today have initiated a self-imposed moratorium.

Puffins are long-lived species and a life­span of between 20 and 30 years is not unusual, yet Euan Dunn, principal marine adviser to the RSPB, explains the implications of persistent breeding failure. “Puffins on Shetland or the Westmans may go on attempting to breed for years, even decades, but eventually all those old adult birds will die off and, if they haven’t reproduced, then the numbers will start to plunge.”

BirdLife International, a conservation network that classifies the status of birds worldwide, has reached the same conclusion. It judges that the Atlantic puffin is likely to decline by between 50 and 79 per cent by 2065. The nation’s most beloved seabird has been declared a species that is vulnerable to global extinction.

To unpick the story of puffin losses, marine ecologists have examined the bird’s oceanic ecosystem and looked particularly at changes in the status of a cold-water zooplankton called Calanus finmarchicus. This seemingly insignificant, shrimp-like organism plays a crucial role in North Atlantic biodiversity and has experienced a huge decline as sea temperatures have risen steadily since the 1980s. While the decline of the finmarchicus coincided with swelling numbers of a close relative, this other zooplankton species is less abundant and nutritious.

As the finmarchicus has suffered, so, too, has one of its main predators, the lesser sand eel. And it is this formerly superabundant fish that is the staple food of puffins in many areas of the Atlantic. At the root of the disruption to marine life are the hydra-headed effects of climate change.

Though no one disputes that an important shift is under way in the sea areas of northern Britain and beyond, not everyone agrees that the present puffin situation is a crisis. A leading British expert, Mike Harris, thinks it is premature to designate the bird an endangered species. There are still millions of puffins and, he says, “We need numbers to plummet before we even start to assume that things are terminal.”

Similarly, Bergur Olsen, one of the foremost biologists studying puffins in the Faroe Islands, believes that the talk of extinction is over the top. “The food situation may change and puffins may well adapt to new prey, and then their numbers will stabilise and perhaps increase,” he says.

***

On Staple Island, the extinction designation does appear bizarre. The Farne Island puffin population has increased by 8 per cent since 2008 and there are now 40,000 pairs. This success mirrors a wider stability among puffin colonies of the North and Irish Seas. The distinction in feeding ecology which may explain the birds’ varying fortunes is that, in the southern parts of the range, puffins can prey on sprats when sand eels are scarce. Sprats appear to have suffered none of the disruption that assails the other fish.

But Dunn says it is important to look at the whole picture. “It’s fantastic that puffins are doing well in places like the Farnes, but remember: Britain holds less than 10 per cent of the world total. Also, the declines that have beset puffins in Shetland and St Kilda are even worse for other seabirds.”

The numbers of a silver-winged gull called the kittiwake have fallen by 90 per cent in Shetland and St Kilda since 2000 and by 80 per cent in the Orkneys in just ten years. Shetland’s guillemot numbers have also halved, and the shag, a relative of the cormorant, has experienced falls of over 80 per cent on many islands since the 1970s – 98 per cent, on Foula. Most troubling is the fate of the Arctic skua, which feeds mainly on fish it steals from other seabirds and is reliant on their successes. Its declines are so severe that Dunn fears its eventual loss as a breeding species in Britain.

While there is disagreement about what to call the puffin predicament, there is unanimity on one issue: much of the data that informs the discussion in Britain is out of date. All of these seabirds, which are of global importance, have been monitored decade by decade since the 1970s. Yet the most recent big audit of our cliffs and offshore islands was concluded in 2000. The full census data is now 16 years old. The organisation that underwrites this work is the Joint Nature Conservation Committee; it is sponsored by the Department for Environment, Food and Rural Affairs, which has suffered deep budget cuts since the 2008 financial crisis. There is no certainty that another comprehensive census will be mounted any time soon.

“Much is made on wildlife television of how special these islands are for wildlife and how much we care about it,” Dunn says. “In the case of our seabirds, one of those claims is indisputably true. Britain holds populations of some species that are of worldwide significance. But if we lack even basic information on those birds and how they’re faring, especially at a time when our seas are in such flux, what message does that send about how much this country cares? And how can we ever act effectively?”

The plight of the puffin is shedding light on the fortunes of our marine wildlife generally and the shifting condition of our oceans as a result of rising carbon-dioxide levels. Now, puffin politics is also starting to show
this government’s indifference to nature.

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue