The gap between rich and poor in the UK is very large by both international and historical standards: wealth inequality grew in the 1990s for the first time in a century and the top one per cent now own a quarter of all wealth. And yet policies that might reduce the gap, such as inheritance tax, are being eroded rather than reinforced.
It must be the mission of the progressive left to make the case for inheritance tax by showing what good it does, and how it can create a fairer Britain. A new pamphlet from the Fabian Society does exactly that by: challenging various myths about inheritance tax; making a strong moral case for the tax; and suggesting reforms of the tax to make it fairer.
All taxes are unpopular but perhaps none more so than inheritance tax with half the population supporting total abolition. However, these views are based on widespread ignorance. Research by Karen Rowlingson and Stephen McKay showed that people were most likely to think that 25-49 per cent of the population paid inheritance tax when the actual figure is closer to five per cent.
It is therefore a myth that the tax penalises ‘average’ hard-working families. It is important to challenge such myths but this alone will not help us to build a strong case for inheritance tax. Progressives in the US used similar statistically-based arguments but these failed to prevent the US version of inheritance tax from being scrapped in 2001. The lesson from America is that we must build a strong moral case for taxing wealth transfers.
Central to the moral case for inheritance tax is the simple point that it is fair to tax unearned, windfall gains at a higher rate than hard-earned wages. Furthermore, inheritance contributes to widening inequalities which give some children far more opportunities than others. The best way to become rich, it seems, is not to work hard or save, but to choose your parents wisely. If we want to give all children a reasonably level playing field then inheritance tax can help, particularly if it is then used to pay for policies like better nursery care and education for children in low-income families. Public support for inheritance tax may also be higher if we make the link between the tax and spending on childcare and education services.
So inheritance tax can, and should, be defended on moral grounds. But it is not, in its current form, a perfect tax. A recent essay by Sonia Sodha and Howard Reed for the Progress Essays pamphlet on taxation pointed to various problems with it, not least the fact that it is notoriously easy for the very wealthy to avoid. They argued for an annual tax on land value and a tax on capital receipts rather than bequests.
The authors of the Fabian pamphlet also argue for a lifetime capital receipts tax where people should be allowed to receive a certain amount over their life in inheritances and gifts, with transfers above this level taxed at an increasing rate. One model for this would be an £80,000 lifetime tax-free limit, with tax imposed on everything above this.
The last 10 years under Labour have seen wealth inequality rise and inheritance tax cut. The government needs the political courage to put forward strong moral arguments for a fair tax system or children’s life chances will increasingly be determined by luck of birth rather than merit.