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15 April 2008

In defence of inheritance tax

It's time to put the issue of progressive taxation firmly back on the agenda, argues Stuart White in

By Stuart White

For too long we have not had a public debate about fair taxation. Take the case of inheritance tax. For years the right-wing press, supported by organisations such as the Taxpayers’ Alliance, made the arguments against inheritance tax. No one replied. The government maintained a nervous silence, hoping that if it did not talk about the tax, it would not become an issue. But last year, the Conservatives put paid to that. Announcing a bold new policy of raising the tax threshold, they killed off all talk of a snap general election and pushed the government into a panic-driven cut in the tax.

Yet, when one looks at the arguments of the critics, they are feeble. To begin with, much of the criticism of the tax rests on mistaken assumptions about how many households are affected by it. The latest data we have, for 2004/5, indicate that only 5.4 per cent of estates paid any inheritance tax. But research by Karen Rowlingson and Stephen McKay shows that people routinely guesstimate the proportion of households affected to be in the region of 25 per cent to 49 per cent. Political and media commentary routinely compounds this misperception.

However, correcting such errors is not enough. For even if only 5.4 per cent of estates currently pay the tax, is this a state of affairs that progressives want to defend? Under a fair tax system, perhaps a much higher proportion of estates would pay some tax. It is important, then, to engage the right on the moral arguments about the tax’s fairness.

‘Inheritance tax is a double tax,’ the critics say. But it isn’t, for the simple reason that someone who is dead can’t pay taxes. The tax is paid by the recipient, and is a first-time tax from their point of view. And why would it matter if it was a double tax? If a double tax is any tax one pays having already paid tax on one’s income, then sales taxes and council taxes are double taxes. But we don’t see the same indignation about them.

‘Inheritance tax penalizes thrift and hard work,’ the critics say. Actually, the tax helps ensure that wealth is distributed more in line with thrift and hard work because it prevents the spendthrift and the lazy maintaining wealthy lifestyles through inheritance.

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‘Inheritance tax tramples on family relationships’, the critics say. Certainly if we were to tax gifts and inheritances at 100 per cent, something important in family relations would be lost. But some inheritance tax might actually improve family relations: while relatives would still be able to pass on some items of significance without tax, the financial incentives that sometimes fuel threats of disinheritance or sibling rivalry would be diminished.

Above all, we must challenge the critics to say whether they really believe in equality of opportunity. If so, how can they oppose taxing inheritance? As inheritances are unequal and related to social class, they almost certainly compound inequality of opportunity.

Sometimes, critics will try to accommodate this point, arguing that inheritance tax should be there for the ‘very rich’. While this is a welcome concession, progressives should not be satisfied with it. If we really believe in equal opportunity, then perhaps inheritance tax should apply also to the moderately affluent as well as the very rich.

Over the past decade or so, some lucky households have seen their wealth increase two or three-fold thanks to the general increase in house prices. The flip-side of this is that many ordinary people are locked out of the housing market. Why shouldn’t the families who have received this unearned windfall in housing wealth be required to share some of their gains with the less fortunate? If some of this unearned wealth is captured through inheritance tax, isn’t that simple fairness? Can a society that takes equal opportunity seriously afford to do anything else?

Stuart White is a lecturer in the Department of Politics and International Relations, and tutor at Jesus College, Oxford University, where he is also Director of the Public Policy Unit. He is the author of Equality (Polity Press, 2006) and co-author, with Rajiv Prabhakar and Karen Rowlingson, of a new Fabian Society pamphlet, How to Defend Inheritance Tax

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