Tuesday, August 22, 2006

What have your parents ever done for you...

Tristan writes in my comments box:

  1. You are less likely to invest knowing that the state is going to take half your wealth when you die
  2. And unless you scrap income tax, inheritance tax is a double tax
  3. Would you tax someone because their parents gave them genes to be intelligent? They didn't have to do any work for that. Or perhaps being attractive?
I started responding, but my response became a post in itself so I thought I'd include it here.


  • If the system is set up correctly then people should have incentives to save for retirement and then spend all their life savings after they retire so they die with zero wealth OR bequest the extra money to charity. This is a difficult one since people often don't know precisely when they're going to die, but IMO this is primarily a pensions management problem. Assuming people won't save assumes that you can't set up a system to encourage people to save and then spend most of the savings before they die. The government will still get a fair bit of money in inheritance tax even if the general trend is towards large-scale spending of estates in retirement and charitable bequests.
  • Covered in the comments box. First, reducing income tax counteracts this to some extent. Second, if previously earned income shouldn't be taxed again then if I employ a plumber the government shouldn't tax his income because I've been taxed on my income already.

The third point requires a bit of a story.

Liberals believe in equality of opportunity. This means that everyone (ideally) should have the same opportunities in life. This means it's unfair if John Smith's parents are poor so he can only attend a school in special measures whilst Fred Bloggs' parents pay for him to attend Eton. John Smith and Fred Bloggs may have equal merit but John Smith doesn't have the same opportunities as Fred Bloggs. In reality, it's difficult to ensure this and its probably better if Fred Bloggs has lots of opportunities and John Smith has some, than both John Smith and Fred Bloggs have few opportunities.

To ensure equality of opportunity, the government should try to ensure that John Smith has access to a good school despite the fact his parents are poor. But the government needs to pay for this so needs to levy some taxes somewhere. The idea is to ensure these taxes are as fair as possible (obviously). Inheritance tax is a fair tax and fairer than income tax.

If we tax very wealthy people (Tristan's 'envy taxes') then this might be unfair. If John Smith works very hard after leaving his sink school, starts a business selling cows on brightly coloured treadmills to environmentally conscious urban dwellers who want fresh milk/greener electricity and after working 26 hours a day, 7 days a week for several years makes millions... then we're penalising John Smith for his hard work and bright ideas just because it annoys Fred Bloggs who's now working flipping burgers in McDonalds. Further, if John Smith knew he was going to be taxed through the nose, he may never have set up MooPod (TM) in the first place.

But we don't know if John Smith made his millions with MooPod because he was hard-working or because he has an IQ of 145 whereas Fred Bloggs has an IQ of 101. Around 50% of John Smith's IQ came from his parents and thus whatever proportion of his millions is directly due to his 44 point higher IQ is 'unearned income'. If we knew at birth that John Smith was going to make £44 million more than Fred Bloggs directly due to that 44 point IQ difference then the fairest thing would be to levy a 'gene tax' of £44 million to be repaid over John Smith's lifetime. This would mean that John Smith and Fred Bloggs start on a level playing field and any money John Smith earned above that earned by Fred Bloggs was due to the application of his skills for the benefit of society and his hard work. If we levied the 'gene tax' at birth based on average amounts of money earned as a result of particular skills (like IQ) then people would still be encouraged to display enterprise and hard work because the 'gene tax' would be a one-off payment unrelated to how hard they worked during their lives.

Unfortunately, a future government would find that it's 'gene tax' screening programme was more of a disaster than the current government's ID cards scheme. Because we can't decide if John Smith set up MooPod (TM) because he had a higher IQ or because his father instilled a work ethic in him from birth... or even because of a chance encounter with a cow on a treadmill during a school trip. Further, John Smith may have used his IQ of 145 to earn several million but Maria Jones (IQ of 150) may set up a band, fail to make a break and end up living in a caravan and busking. Hence, levying an average charge based on IQ would be deeply problematic - Maria Jones would never be able to pursue her dream to play the digeridoo professionally but would have to work for an investment bank to pay back her 'gene levy'. Further, if we try valuing people's genetic inheritance at birth, some parts are really subjective (like attractiveness - Brad Pitt does nothing for me) and how do we value football skills as opposed to IQ.

Now imagine that Joseph and Jane Bloggs die and leave Fred Bloggs £500,000. This is unequivocably absolutely nothing to do with Fred Bloggs' work ethic, his IQ or his talent at playing the harmonica using his toes. All he had to do to earn that money is sit waiting for his parents to die. This income is entirely unearned. Unlike John Smith's millions, there's no question whether Fred Bloggs sudden good fortune is due to his IQ (his 'unearned' income), his determination, vision and hard work (which may or may not be genetic but is 'earned'), his upbringing including his peer group and/or his life experiences. It's relatively easy (compared to the 'gene tax') to determine how much unearned income Fred Bloggs received from his parents. Further, Fred Bloggs receiving this money acts counter to equality of opportunity. Fred Bloggs has opportunities due to receiving this money which John Smith never had because his parents were poor.

The moral of the story - since you have to levy some taxes then taking the unspent and ungifted parts of estates in huge inheritance taxes is one of the fairest places to levy them.

Further reading: The Undercover Economist which I faintly remember talks about gene levies with reference to Tiger Woods.

15 Comments:

  • At 10:40 am , Blogger Will said...

    I don't think the "double tax" thing is much of an argument. VAT is a double tax if you've already paid income tax on the money you're spending; petrol duty is a double tax for the same reason.

    If I inherit thousands of pounds, I've never been taxed on that money before.

     
  • At 11:18 am , Blogger Julaybib said...

    Many middle class people in this country are looking for any excuse/slogan not to give their money to governments coz they don't give a tinker's cuss about helping anyone except themselves. Fair enough. Let them enjoy their wealth today, and sizzle for the rest of eternity. It's their 'choice'.

    Wasalaam

    TMA

     
  • At 11:29 am , Blogger Liberal Neil said...

    Tristan has got his facts wrong anyway.

    Inheritance Tax doesn't take half of anyone's wealth.

    It takes 40% of the value of the estate after the first 285,000 UKP.

    If you leave an estate of 385,000 UKP Inheritance Tax of 40,000 UKP will be payable, or 10%.

    If you leave an estate of 785,000 UKP (which would make you one of the very wealthiest) Inheritance Tax of 200,000 UKP would be due, or 25%.

    Of the 600,000 people who left estates last year only 37,000 paid any Inheritance Tax. So it is not hitting most people on ordinary incomes.

    Should such people really be the first priority for tax cuts?

    Far better to take the Lib Dem approach of raising the basic allowance level on Income Tax and NI so that the same money helps hunddreds of thousands of the lowest paid instead.

     
  • At 1:57 pm , Blogger Bishop Hill said...

    If the system is set up correctly then people should have incentives to save for retirement and then spend all their life savings after they retire so they die with zero wealth OR bequest the extra money to charity.

    Why is this the correct way to set up the system? Why should people have to spend all their money before they die? Why shouldn't they leave it to their children?

    Surely the essence of liberalism is letting people decide what to do with their lives rather than dictating to them what is the correct thing to do?

     
  • At 3:02 pm , Blogger Femme de Resistance said...

    Why is this the correct way to set up the system? Why should people have to spend all their money before they die? Why shouldn't they leave it to their children?

    Surely the essence of liberalism is letting people decide what to do with their lives rather than dictating to them what is the correct thing to do?


    Yes. It is. The problem is that in order to provide common goods like the police or a health service for those who cannot afford to go private in order to ensure equality of opportunity, you need to tax people. This means taking money away from people which is *their* money and which they don't necessarily want to give to government if they could afford to pay for private security, healthcare, etc. There are various justifications for this, but the general idea is that starving people are only *free* in name and not in fact.

    Now, given the various available opportunities for taxation, this is probably one of the better ones. It doesn't penalise hard work and it doesn't charge people while they're alive and using their money. Unfortunately, some people will *choose* to spend all their money before they die rather than *choosing* to give it to government in inheritance tax after death.

    Inevitably, the government will get some money but the *take* will be much less than in theory because people will find ways around a large inheritance tax.

     
  • At 8:27 pm , Blogger Bishop Hill said...

    A few points:

    It seems to me then that there is a conflict between the liberal fundamental of leaving people to get on with their lives and trying to create a level playing field (which I would view as a statist rather than a liberal ideal).

    I don't accept your description of starving people not being free. This is poverty you are talking about, not freedom (by any reasonable dictionary definition).

    It seems like a bad tax to me. It creates a perverse incentive to blow money rather than save or invest for ones children. As you suggest it would probably be easy to avoid because of this. Land tax and flat taxes on income strike me as much better alternatives.

     
  • At 7:30 am , Blogger Femme de Resistance said...

    It seems to me then that there is a conflict between the liberal fundamental of leaving people to get on with their lives and trying to create a level playing field (which I would view as a statist rather than a liberal ideal)

    You're thinking of 'equality of outcome' which means everyone is constantly on a level playing field. Equality of opportunity means that everyone starts on a level playing field but that inequalities of wealth are not in of themselves a 'bad' thing because they could be as a result of hard work, for example. Statist ideas fall down because by trying to ensure equality of outcome they penalise people for working, using their skills or having new ideas.

    I don't accept your description of starving people not being free. This is poverty you are talking about, not freedom (by any reasonable dictionary definition).

    The philosophical idea is that they may be free before the law, but they are not *free* in any functional sense. If they do not have *the basics* they cannot improve their circumstances. If they do have the basics and perhaps appropriate training, then they are then *free* to improve their situation.

    creates a perverse incentive to blow money rather than save or invest for ones children.

    This is very radical and *against nature* but in terms of ensuring equality of opportunity then the worst thing possible is one 'saves for ones children' because ones children can have very little 'merit' and benefit from your 'merit', which is not a meritocratic opportunity. It also restricts innovation because if you have received a windfall from your parents, your incentive is to sit on your ass.

    As you suggest it would probably be easy to avoid because of this.

    True. It is better than income tax which leads onto:

    Land tax and flat taxes on income strike me as much better alternatives.

    Land tax AFAIK is a tax on 'unearned' capital in the form of land. My post was mainly arguing with Tristan's point about 'gene levies' and assuming that the basic tax system was the same as now (i.e. an argument why inheritance tax should NOT be scrapped). Obviously, in a radically revamped tax system, taxes should focus on creating a market in externalities that are not otherwise appropriately valued over the short-term in the market system (e.g. pollution) AND focusing on 'unearned' sources of income, including inheritance.

     
  • At 3:52 pm , Blogger Bishop Hill said...

    I understand that you think I've confused equality of opportunity and equality of outcome. I haven't. I think it is equally statist to try to supplant the decision of an individual regarding passing their money on to their children or grandchildren as to try to make all outcomes equal.

    Why can't I make the decision for myself? Why should a democratic majority decide for me? Why should democracy trump liberty?

    I'm not sure what you mean by "in a functional sense". If you accept liberty or freedom to mean absence of coercion (as the dictionary defines it) then someone can be absolutely destitute and absolutely free. Their circumstances may be difficult. Impossible, even. But they are free.

    You say that someone who is poor cannot improve their circumstances. This is surely not correct. Lots of people raised themselves out of poverty and illiteracy before the welfare state. It would be harder, yes. But to say they cannot is to go too far.

     
  • At 7:50 am , Blogger Femme de Resistance said...

    I think it is equally statist to try to supplant the decision of an individual regarding passing their money on to their children or grandchildren as to try to make all outcomes equal.

    Ultimately, it's theoretically statist to take money that people have earned away.

    If you've got to tax someone at all (which is necessary IMO to provide a 'safety net' and public services) then it's far better to tax income that they haven't earnt.

    You, correctly, identify capital gains to land. Your argument with inheritance tax arises because you see it as an issue of what you do with your money. Rather like if the government stopped you buying a bar of chocolate incase you got fat. I don't see it that way. When your inheritance is taxed by the government, it is at the point of giving. The heir is taxed. You are not being taxed because you are dead (by definition).

    Hence, someone else (who you just happened to give your money too) is being taxed by the government because they have received a capital windfall that they didn't earn.

    The government is not preventing you giving your money away. It's just by giving the money away in that fashion, someone else is being taxed.

    This will tend to 'incentivise' people to give their money away (in the economics sense) before they die, because people tend not to want to give money to the government. But in an ideal world, this wouldn't happen. You're believing I'm being statist because you're confusing what I know WILL happen (people give away money) and what SHOULD theoretically happen (government large tax yield from unearned income).

    I'm not sure what you mean by "in a functional sense". If you accept liberty or freedom to mean absence of coercion (as the dictionary defines it) then someone can be absolutely destitute and absolutely free. Their circumstances may be difficult. Impossible, even. But they are free.

    Ok. Perhaps I should rephrase. Not everyone can be completely free from coercion at any given time because some people's freedom of action will impinge on others.

    Although in the absence of the welfare state some people will 'get by' and in the absence of any direct coercion they are free before the law, their ability to participate in both civil society and a market economy is so limited as to be meaningless because of their large and obvious source of internal coercion (they are destitute). Further, a body of destitute people is on average, very likely to constrain others freedom of action out of desperation.

    If you accept that some people's freedom MUST be constrained to permit others to be free, then it is far better I tax some unearned income to permit these people a living wage, training, etc. which will increase THEIR freedom of action a large amount for a small input. This raises the issue of how much I should give people to which the answer is sufficient so they can meet basic needs (food, shelter, access to training and job-search resources) to remove the element of desperation.

    I seem to get into a lot of these arguments with people who, I suspect, favour a nightwatchman state. A nightwatchman state is oppressive because power is not just held by the government.

     
  • At 5:10 pm , Blogger Bishop Hill said...

    "When your inheritance is taxed by the government, it is at the point of giving. "

    Not true. They also take a proportion of anything you have given in the previous seven years.

    If I'm reading you right, you accept that people will give their money away in order to avoid tax. So the tax take is small, and we have vulnerable old people who have divested themselves of any means of supporting themselves.

    This seems to me to prove the point that it's a bad tax.

    ...their ability to participate in both civil society and a market economy is so limited as to be meaningless because of their large and obvious source of internal coercion (they are destitute).

    I don't understand how their destitution (the idea of internal coercion seem to me to be a contradiction in terms)prevents them from participating in civil society. They need to get work pretty desperately of course, but the solution to their problems lies within them doesn't it? They need to work.

    "Further, a body of destitute people is on average, very likely to constrain others freedom of action out of desperation."

    This sounds a little like the recent arguments that the UK should change its foreign policy in order to avoid suicide bombings. Threats of the initiation of violence are surely not a good basis for policy decisions.

    Of course I accept that people's freedom should be constrained. But only by other people's freedom. Not their wish to be wealthier.

    "A nightwatchman state is oppressive because power is not just held by the government."

    I'm sure you can't mean this. Surely a liberal wants to avoid concentrations of power. You seem to be saying that all power should reside with the state.

    (Please let me know if this is becoming boring - don't want to overstay my welcome!)

     
  • At 5:38 pm , Blogger Femme de Resistance said...

    I'm sure you can't mean this. Surely a liberal wants to avoid concentrations of power. You seem to be saying that all power should reside with the state.

    I mean that the government is not the only body out there or individual who can oppress people. Thus, assuming that by scaling down the functions of the state to defence/police people will automatically be freer is flawed. Take Microsoft - markets are freer as a result of anti-monopoly legislation.

    They need to get work pretty desperately of course, but the solution to their problems lies within them doesn't it? They need to work.

    Yes, but what if their sector of work has disappeared and they need retraining but can't afford it? Or can't get work? And can't afford the equipment they need to be self-employed and can't get a loan from a bank to fund their purchase?

    Not true. They also take a proportion of anything you have given in the previous seven years.

    If I'm reading you right, you accept that people will give their money away in order to avoid tax. So the tax take is small, and we have vulnerable old people who have divested themselves of any means of supporting themselves.

    Heck, I think the whole tax system is flawed. The pensions system we have is terrible - it penalises people for saving for retirement! If you hiked inheritance tax without doing anything else then you'd end up with a lot of people going on expensive holidays to spend their money and then burdening themselves on the state without giving any inheritance tax take either.

    That's not to say I'm not in favour of a tax on unearned income at death as part of a shift in taxation from earned/productive to unearned...

    And that I don't think if you could creep up inheritance tax without causing over 60s to run for Barbados that it would be better to do that and reduce income tax, than scrap inheritance tax.

     
  • At 5:42 pm , Blogger Femme de Resistance said...

    I mean that the government is not the only body out there or individual who can oppress people. Thus, assuming that by scaling down the functions of the state to defence/police people will automatically be freer is flawed. Take Microsoft - markets are freer as a result of anti-monopoly legislation.

    To clarify, think about it like a set of scales (with more than 2 sides) with various power holders on each side and freedom underneath. Scaling down the state makes people freer if the state is pulling the scales right down on top of freedom.

    If the state is pulling the scales only a little down then scaling the state right down could cause the other end of the scales to drop like a stone.

    A nightwatchman state assumes that there is only one end of the scales - the state. Thus, by removing the state, everyone becomes free. In the real world there are other potential oppressors like landowners or organised religion or large corporations. The state can counterbalance those if given appropriate levels of power.

    Liberals want to distribute power such that all the sides of the scales are in an uneasy balance and that neither side is pressing down on freedom.

     
  • At 5:31 pm , Blogger Chris Black said...

    "I don't accept your description of starving people not being free."

    As someone who benefited from free school dinners paid for out of people's taxes (though thankfully, my mother and I weren't starving, or even hungry, just pretty poor even though my parents had worked full-time for a total of 78 years between them : sorry Bishop, that doesn't sound much like Liberal Democracy to me.

    Perhaps it's a totally new political concept -"Liberal Oligarchy" (the rich and powerful look after themselves)

     
  • At 7:24 pm , Blogger Bishop Hill said...

    I mean that the government is not the only body out there or individual who can oppress people.

    Agreed.

    In the real world there are other potential oppressors like landowners or organised religion or large corporations. The state can counterbalance those if given appropriate levels of power.

    Actually, I tend to agree with this statement which is completely reconcilable with the idea of a nightwatchman state. The state exists (or should exist) to prevent transgressions by individuals or organisations on individual liberty. So a nightwatchman state would do defence and law and order, but not much else. (I'm assuming here that you are using the dictionary definition of "oppress" - to treat with tyrannical cruelty or injustice).

    Yes, but what if their sector of work has disappeared and they need retraining but can't afford it? Or can't get work? .....

    Why should they be able to force other people to help them out of their difficulty? Perhaps the other people's need is greater? Certainly their moral right of these others to the money is greater. If a sector of work has disappeared, then taking someone else's money isn't going to bring it back. It will only precipitate the loss of other work sectors.

    This relates also to Chris's comment.

    Chris - the whole problem as I see it is that people are spending all their waking hours trying to manipulate the tax and benefits system to their advantage. If you benefited from free school meals (although not starving) the question is what was the cost of this to other people? Do you know that your need was greater than theirs? Was your need so much greater that it justified the use of coercion?

    Perhaps if we all just kept what we earned there would be less need for free school dinners in the first place. Certainly there would be more wealth to pay for them because we wouldn't be supporting the civil servants to administer the whole process. And we wouldn't be permanently supporting 1m people on unemployment benefits and 2.5m on incapacity benefits. The cost of this, both in financial and social terms is astronomic. That's what "liberal" democracy (socialism, in other words) has to justify.

     
  • At 8:14 pm , Blogger Chris Black said...

    Bishop, for now I'm just going to have to accept that we disagree... I'd like to continue the debate but I must get back to work...!

     

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