Monday, February 12, 2007

Meritocracies need wealth taxes

Lord LipseyLord Lipsey thinks those arguing for the abolition of inheritance tax are delusional:

Six per cent of households are rich enough to pay inheritance tax because they have £285,000 or more. According to the official Family Resources Survey, in 2004-05, 49% of households had less than £1,500 in savings. Before Gordon Brown rushes to the rescue of the rich, he might give a thought to that group of people, eight times more numerous and many, many times more deserving.

It is certainly the case that in a meritocracy, allowing families to build up wealth over generations will inevitably lead to an aristocracy of the type we are still trying to get rid of in the UK. This is why Bill Gates, Warren Buffet and other billionnaires have campaigned against President Bush's abolition of the US estate tax. As Lipsey points out, wealthy families can buy their children advantages in areas such as education and healthcare that are hardly compatible with an equal-opportunity society.

The practical problem with our inheritance tax is that it hits families whose main asset is their home, whereas richer individuals have both more diversified assets and better tax advice to minimise its impact. It might therefore be more equitable to replace inheritance tax with a general Capital Transfers Tax, as has been suggested by IPPR; or with an annual wealth tax of around 1% of assets that could be postponed by capital-poor pensioners until the sale or transfer of their property.


Anonymous said...

Good observations. Certainly its true that excessive wealth has at least the potential for negative consequences, certainly for the individual. I'm not sure they are as bad as the consequences of high taxation (e.g lower productivity, lower investment generally). I've heard of wealthy businessman donating to charity to avoid passing on such excessive wealth. This is very sensible, for those families that volunteer to do this. As Hank Poulson might.

I have trouble with this bit:

"wealthy families can buy their children advantages in areas such as education and healthcare that are hardly compatible with an equal-opportunity society."

Rubbish. Wealth does not create opportunities, it merely enables or bars their exploitation. If it were a societal norm that e.g. black people, or people from Birmingham were excluded from private schools on those criteria then this is incompatable with an equal opportunities society it just plain doesn't follow.

In the particular case of education, what's so bad about a rich person paying for a good education for a child? Absent the potentially corrupting influence of excessive wealth (which is a matter of upbringing and is manifest as what? lower productivity? Higher spending??) this is a pure good both in individual and societal terms.

Also, how is it that people with small savings are any less deserving of compulsory taxation than the rich in a meritocracy? Surewly, in a meritocracy those with merit deserve to posses the wealth equal to their merit.


Ian Brown said...

If the quality of your education (and hence a significant part of your life chances) depends on the wealth of your parents, then we hardly live in a meritocracy where everyone succeeds or fails on their own merits.