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Inheritance Tax Is Against Human Nature

Summary:
When people think about inheritance, they invariably conjure up a mental image of some plump duke or marquis, sipping cocktails on a yacht in the Bahamas, courtesy of their twelve-times-great grandmother who slept with Charles I and was rewarded with a grand tract of land that turned out to have huge coal deposits under it.Yes, that is galling, but bygones are bygones. You can’t unscramble the past and say how much of such a person’s wealth today, which might have been augmented or diminished over the centuries comes from legitimate or illegitimate sources (and even that definition is probably a matter of opinion). But who cares? I am not poor because some aristocratic landowner is rich. Wealth today is something that is created, not taken from others, usually by force, as it was for most

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When people think about inheritance, they invariably conjure up a mental image of some plump duke or marquis, sipping cocktails on a yacht in the Bahamas, courtesy of their twelve-times-great grandmother who slept with Charles I and was rewarded with a grand tract of land that turned out to have huge coal deposits under it.

Yes, that is galling, but bygones are bygones. You can’t unscramble the past and say how much of such a person’s wealth today, which might have been augmented or diminished over the centuries comes from legitimate or illegitimate sources (and even that definition is probably a matter of opinion). But who cares? I am not poor because some aristocratic landowner is rich. Wealth today is something that is created, not taken from others, usually by force, as it was for most of human history. It is not a zero-sum game. And it’s easily lost.

To see that, look at the annual ‘Rich List’ survey published by the Sunday Times. When the survey started, every one of the richest fifty or a hundred people owed their wealth to inheritance. Today, more than half have made it themselves. They’ve even pushed the Queen down the rankings. 

And all power to those billionaires. They have made themselves rich by producing goods and services that other people want to buy from them—quite willingly—and which transform their lives. The computers that make our domestic and work lives easier, the online systems that deliver goods to our door in minutes, the smartphones that connect people all around the planet and put a warehouseful of useful amenities (camera, torch, alarm clock, books, music collection, atlas, timetables, payment card and the rest) right in our pocket—all these things improve the lives of billions of people. The people who create that sort of social benefit are rewarded by grateful customers. And they should be able to keep that reward. Rewarding success is a good way to inspire more of it. Punishing success is a good way to kill it, or drive it away. You could take the entire wealth of billionaires and distribute it evenly across the planet, but it wouldn’t make most people noticeably better off and the poorest would still be poor a week later. The way to create prosperity is to encourage it and let it flourish. Not to double-tax it, once when it is earned and then again when it is passed on.

But still we’re looking at the wrong thing. Inheritance is particularly important to families who are less wealthy. They scrimp, save, and pass on a greater proportion of the assets to the children than do rich families. That’s economically and socially important because it reduces relative inequality by ensuring that less-wealthy families’ capital is kept intact instead of being dissipated. The children are left an asset that they can use to improve their own lives. They might use it to invest in a business and improve the lives of their customers too. Or, with today’s restrictive planning rules, it might be the first family home they can afford to own and live in. One of the useful social institutions that inheritance taxes kill off, however, is that of the family-owned business. They used to be common: trusted parts of local communities, with families’ reputations invested in them. But family businesses are often short of liquidity; get landed with a big tax bill when a family member dies, and you have to sell up, because there is no spare cash around to pay it.

Inheritance taxes are bad taxes because they are against human nature. Every parent wants to help their children have a better start than they did. If inheritance is taxed, they will simply look for other, inevitably less efficient, ways to do that. Inheritance taxes are levied very infrequently, on a death, but they are still predictable. People may have years in which to plan how to avoid them (or even evade them) by shuffling around their assets. But that means that their capital is shunted into less productive assets, in order to escape the tax, instead of making its way into productive, profitable and socially beneficial business investments. Inheritance tax is a disincentive to invest productively, an incentive to spend tax-efficiently. It seems quite likely that the harm this does to the economy means that inheritance taxes have actually produced a negative return for most or all of their 125-year history.

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Dr. Eamonn Butler
Eamonn Butler is Director of the Adam Smith Institute, rated one of the world’s leading policy think-tanks. He has degrees in economics, philosophy and psychology, gaining a PhD from the University of St Andrews in 1978.

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