The Real Question About Inheritance Tax — Can Rich Kids Contribute To The Economy Or Not

By admin on February 12, 2013

The government’s otherwise inadequate proposals on funding social care have set me thinking about Tamara Ecclestone.

Their plans involve a proposal, to increase inheritance taxes by freezing the threshold above which tax is paid. The raises the under-explored question of the desirability of such taxes.

The case for them has traditionally rested upon questions of practicality and ethics: how many loopholes does the tax have? Should the state interfere in family life? Is is desireable that a privileged few should get something for nothing?

There is, however, an economic argument for such taxes, highlighted by Wojciech Kopczuk.

He points out (pdf) that if people expect to get a big inheritance, they have less incentive to work, and so an inheritance tax can be optimal to the extent that it raises work incentives. Emmanuel Saez and Thomas Piketty have shown (pdf) that this, along with other factors, can generate high optimal inheritance taxes.

This raises a paradox. To see it, ask: who are the sort of people who expect to get big inheritances and so are deterred from working? There are two (extreme) possibilities:

1. The rich have high skills, and such skills are passed onto their children by genes or environment. If this is the case, the economy will lose a lot if the children of the rich are disincentivized from working. We should therefore favour high inheritance taxes as a way of reincentivizing them to work.

2. The children of the rich are airheads, wastrels and no-marks, so it’s little loss to the economy if they are out of the labour market. If this is so, the case for high inheritance taxes to motivate them to work is weak.

Which generates my paradox. The sort of people who instinctively oppose inheritance taxes tend, I suspect, to believe the rich pass on skills to their children. But if you believe this, you should favour higher inheritance taxes on economic grounds. On the other hand, those – like me – who viscerally support inheritance taxes tend to think the children of the rich are abominations who can safely be kept out of the labour market. To us, the country would be a better place if George Osborne had been disincentivized from working. But if you believe this, you shouldn’t want an inheritance tax that forces the little bastards into work.

The point of this is two-fold. First, there can sometimes (often) be a conflict between rationality and instinct. Secondly, one’s beliefs in the fairness of taxes can sometimes sit uncomfortably with one’s views about their efficiency.

Another thing: you might object that inheritance taxes are inefficient insofar as they deter parents from working. Maybe, maybe not. But this doesn’t, I think, weaken my paradox.

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