Inheritance tax exemptions perpetuate inequality: here’s why they must end.
by Alex Godfrey Strowbridge
What are income inequality and inheritance tax?
By 2020, the inheritance tax-free threshold will increase from £325,000 to £500,000. The average person in the UK works hard to earn £1,336,279 across their entire lifetime (ONS, 2014). Therefore, this increase in tax-free money – handed to the rich, from the rich – allows individuals to inherit as much as a third of the average Briton’s lifetime earnings; in one go. Robert Schiller suggests this ‘renewed greed of the top 1% has had worse effects than even the financial crash of 2008’ (Dorling, page 28, 2014). It is clear that inheritance tax perpetuates inequality. But more worryingly, are the long-term effects inequality have on society. Here – with the support of Thomas Piketty, Richard Wilkinson and Kate Pickett – I will look at why inheritance tax is bad, why inequality is worse, and the possible politically and economically viable solutions.
Why is inheritance tax bad?
Thomas Piketty’s big idea is this: inherited wealth grows faster than earned wealth. The rate of return on capital is usually around 3-5%, which outweighs the rate of growth (usually 1.5%). From this, he has extrapolated the continuous growth of inequality. His solution? He calls for a ‘confiscatory global tax’. This would be a progressive tax on private wealth, his take on redistributing income fairly in order to counteract the effects of inheritance (Mason, The Guardian, 2014).
His take is that inheritance removes equality of opportunity. We will never all have an equal start to society, and our start very much determines the course of our lives and social mobility. As the wealth remains within a small portion of society, so does it increase at a faster rate than the wealth of the rest of society, thus widening the gap between the top decile and ‘the rest’. Arguably, the practical equality of opportunity begins at conception; the foetal development and environmental and social factors of child development are already hugely differed depending on the parent’s position in society. Therefore, the added boost of inheritance is entirely unnecessary and unfair to the children who grow up without the buffer of their family’s wealth. This is the perpetuation of inequality.
Why is inequality bad?
Equally as ground-breaking, Wilkinson and Pickett’s findings on the impact of inequality in society. This graph from their famous volume ‘The Spirit Level’ shows that ‘there is a very strong tendency for ill-health and social problems to occur less frequently in the more equal societies’ (Wilkinson and Pickett, 2009, 19-20). They also make clear that this strong correlation is not related to income, as, in fact, incomes are declining in general. The prevalent relationship between income inequality and social unrest is highlighted using social problems such as obesity, life expectancy, imprisonment rates and homicide rates. But why introduce a 100% inheritance tax? In the UK, absolute poverty is below 20%. But it is because ‘the problems in rich countries are not caused by the society not being rich enough but by the scale of material differences between people within each society being too big’ (Wilkinson and Pickett, 2009, 25). Once again, an inheritance tax of 40% feeds the rich and starves the poor. With society becoming increasingly unequal, crime, obesity and other forms of social unrest are also augmented.
What we should do and why it may not work:
The clearest policy option to clutch onto is the redistribution of the inheritance when the owner passes away. I have stated that the most effective form of redistribution is complete taxation. It would dramatically increase the government’s income and allow them to increase welfare spending to close the gap between the highest and lowest decile in society.
However, the Laffer curve – developed by Arthur Laffer – offers a counteraction. It states that beyond a 50% taxation, revenue will actually decrease for the government. This is due to people losing incentives to be productive as they are receiving less and less of their pay. At this point, financial decisions become emotional decisions, and the government experiences diminishing marginal returns on taxation of inheritance, as seen in the graph. The wealthy will hire lawyers and accountants, donate large sums of money and transfer payments to offshore accounts in order to avoid such high rates of tax. And they can afford to! Also, the administrative and political costs of collecting such a high tax render the theory of full taxation less efficient than on first glance.
Inheritance tax perpetuates inequality and inequality is wrong.
In conclusion, as stated by the subtitle of The Spirit Level: “Equality is better for everyone” (Wilkinson and Pickett, 2009). Inheritance tax is fuelling the cycle of wealth remaining in the hands of the few, augmenting inequality and thus, the social issues that come with it. A solution must be found, and a 100% tax on inheritance is one theory proposed by Piketty, and now myself. However, this is not sociologically viable, as the Laffer curve demonstrates. The idea of inheriting £1,336,279 tomorrow may sound enticing, but what about the relentless rise in inequality and social problems? These matters are hand in hand.
Nevertheless, the solution to inequality is still to be found.