I’m still relatively new to the Social Market Foundation and today I’m starting a new series of blogs that goes into our archive of publications. There may be nothing new under the sun but there’s plenty that is new, or at least novel, in our dark library at the SMF. I’ll write about a different publication every Friday.
This week I’ve picked out a 2002 pamphlet by Irwin Stelzer called From Grave to Cradle: Building a Meritocracy. Published just after the Budget in which Gordon Brown raised National Insurance Contributions to increase funding for the NHS, having toyed – according to speculation – with raising inheritance tax instead, Stelzer makes the argument that inheritance tax should be much higher and taxes on earned income should be much lower. It’s a conservative, pro-enterprise case for taxing inheritance. In the week that the Prime Minister David Cameron has dropped the hint that the Conservative party may want to raise the threshold on inheritance tax, Stelzer’s argument is topical again. And the former SMF Director who commissioned the pamphlet, Philip Collins, writes in The Times today on the same issue.
So what does Stelzer say? He starts by dismissing the argument that inheritance tax is a ‘death duty’. After all it’s not paid by the dead person, it’s paid by the recipients of the estate. Then his positive argument for the tax is a pro-enterprise one. Taxing inheritance contributes to an equal opportunity society, one in which, as he puts it, “society is open and characterised by economic and class mobility”. This “encourages entrepreneurship; it keeps envy of the rich and famous at a minimum; it encourages people to look to themselves rather than to government to improve their circumstances; it produces stability that keeps capital costs low.” He even wonders aloud about charging an inheritance tax of 100%, intrigued by the scope this would provide to make a pound-for-pound reduction in other taxes on income. Stelzer stops short of recommending this, because he would like to model the outcomes before making up his mind, but he leans towards it.
This makes perfect conservative sense: people should work hard and keep as much as possible of the rewards for work. Indolence, whether brought about by high levels of state welfare or a too-generous inheritance from mum and dad, should be eradicated.
In terms of this week’s hint from David Cameron, Stelzer’s argument would be that further reductions in inheritance tax should be off the cards because the £3.5bn of revenues currently raised by inheritance tax would then have to be raised by taxes on income. Stelzer’s pro-enterprise arguments are powerful in suggesting why this would be a bad move. Of course that £3.5bn could instead be cut from government spending. Yet the task ahead on cutting spending already looks daunting, and the distributional effects of cutting public spending more to make the room to cut inheritance tax would be likely to be pretty horrible.
What about moving in the other direction, to increase taxes on inheritance, as Stelzer suggests? Tempting as it is to force every generation to prove its own mettle, there are some problems with his argument. Even on Stelzer’s pro-enterprise terms, I reckon 100% inheritance tax would have a big negative impact on any individual’s level of effort and invention. We earn and accumulate partly in order to spend now, to live well, but it’s also to look after those in our wider circle of concern – friends, family, charitable causes. Frankly, part of why we work beyond the means we need is to ensure a legacy, in £s, yes, but also in objects and in the imagination. The idea of what I might leave behind is just as important a driver of effort and enterprise as my needs and wants for consumption. In some way, the fact that we allow inheritance to take place in society reflects an understanding of this element in our behaviour.
Another way of thinking about this is that Stelzer’s conservative version puts too great an emphasis on income over capital. Income gets spent in the present. Capital is what we use to make the future. I would be surprised if inheritance isn’t an important part of how we ensure that there is enough capital in a society to replenish, renew and expand our physical, intellectual and natural resources. Giving all that capital to the government to fund reductions in income tax would make for a more short-termist society. Consideration of this is missing from the pamphlet.
In the end, distributing inheritance differently might be a better objective than eradicating it. Professor Karen Rowlingson from Birmingham University spoke recently at the SMF about the idea of a citizen’s inheritance, acquired when we turn 18. The previous Labour government was trying to create something similar via the Child Trust Fund ensuring that everyone started their adult life with an asset, not just those who were born in certain homes. Reducing marginal tax rates, as Stelzer proposes, by taxing inheritance more heavily may be attractive, but giving everyone an asset either to fall back on or to invest for increasing the productive potential of themselves (higher education, training) or something else (an invention, a new business) may be even better. That doesn’t mean socialising all inherited wealth; small increases in inheritance tax, supplemented perhaps by a bit of land value taxation, could be enough to get started on – or to return to – that journey towards a citizen’s inheritance.