Inheritance Tax

Question 1

What does Piketty (2014) consider the idea tool to regain control over globalised financial capitalism? Does he think it is realistic?

Answer 1

A progressive global tax on capital, coupled with a very high level of international financial transparency. But he describes it as a utopian idea. He sees it rather as a useful reference point.

Question 2

Why, according to Piketty (2014) might a global tax on capital be preferable to protectionist measures?

Answer 2

Because it has the merit of preserving economic openness while effectively regulating the global economy and justly distributed the benefits among within nations.

Question 3

What would Piketty’s tax be applied to?

Answer 3

Individual wealth, on the net value of assets each person controls. For the wealthy it would be based on individual net worth. For the rest, taxable wealth would be determined by the market value of all financial assets and non-financial assets net of debt.

Question 4

Would there be any exceptions to what Piketty’s tax would apply to?

Answer 4

None. He argues that the wealth taxes applied in countries like France and Germany are riddled with exemptions and many asset classes left out.

Question 5

According to Piketty (2014) what would be the primary purpose of a global capital tax?

Answer 5

To regulate capitalism and stop the increase in the inequality of wealth.

Question 6

Name two of the benefits Piketty (2014) has suggested would come from a global capital tax.

Answer 6

It would generate useful information about the distribution of wealth. These reliable statistics can thus be used to eliminate the opaque nature of wealth, which would be good for democracy.

It would also give financial regulators a better idea of the distribution of financial assets, which can be useful for the just and efficient management of banking crises.

Question 7

What is the contributive logic behind a global capital tax according to Pikkety (2014)

Answer 7

Income is often not a well-defined concept for very wealthy individuals, and only a direct tax on capital can correctly gauge the contributive capacity of the wealthy.

Capital is a better indicator of the contributive capacity of very wealthy individuals than is income, which is often difficult to measure.

Question 8

What is the incentive logic behind a global capital tax according to Pikkety (2014)?

Answer 8

The basic idea is that a tax on capital is an incentive to seek the best possible return on one’s capital stock. It would force people who use their wealth inefficiently to sell assets in order to pay their taxes, thus ensuring that those assets wind up in the hands of more dynamic investors.

Question 9

What does Pikkety argue wealth taxes have traditionally not raised much money?

Answer 9

Because much of their content has been drained out because of numerous exemptions.

Question 10

According to Lee (2007), what is the main purpose of the IHT?

Answer 10

Serves an equitable purpose: contributing towards a redistribution of wealth.

Question 11

What is one of the problems with IHT according to Lee (2007)?

Answer 11

The very wealthy are able to avoid paying tax by distributing large amounts of their wealth free of IHT during their lifetime.

Question 12

Who is most disadvantaged by the IHT according to Lee (2007)?

Answer 12

The moderately wealthy. Targets mostly those whose wealth is tied up in their main house rather than the very wealthy who can circumnavigate the tax.

Question 13

What is an accession tax, according to Lee (2007)?

Answer 13

A taxed charged by reference to the value of the benefit received by the donee, and whose rates and exemptions are governed by his or her circumstances.

Question 14

What are the arguments for an accessions tax, according to Lee (2007)?

Answer 14

1) It is fairer and encourages donors to spread wealth.
2) Embraces not only inheritances but also lifetime gifts
3) Can be cumulative over a donee’s lifetime, again encouraging testators to spread their wealth more widely.

Question 15

If you have these three traits, you will be favoured by the IHT, according to Lee (2007).

Answer 15

Healthy, wealthy and well advised. Because you can give away sufficient capital and survive the statutory period.

Question 16

What are some of the difficulties with an accession tax, according to Lee (2007)?

Answer 16

It is more costly for both administrative and compliance purposes.

Question 17

What transfers are exempt under the current IHT structure?

Answer 17

Transfers between spouses and civil partners.

Question 18

What is one way that the IHT has been criticised?

Answer 18

That it amounts to a ‘penalty on hard work, thrift and enterprise.’

Question 19

What are three arguments for abolishing IHT, according to Lee (2007)?

Answer 19

1) Amounts to double taxation because that same property has been taxed once during their life.
2) Sharply rising house prices has led to moderate estates falling over the threshold.
3) The very wealthy can avoid paying the tax through planning techniques.

Question 20

How does Lee (2007) counter the arguments for abolishing IHT?

Answer 20

1) Double taxation: not borne out from the facts that all wealth comprised in estates has been previously taxed. Look at the example of VAT as a tax which arguably amounts to double taxation as well. Also main family home: all the gains have been free of CGT.

Question 21

What are the three reasons (equity criteria) that Lee (2007) lists for IHT?

Answer 21

1) Redistribution: vertical equity is what we seek, hence taxing people according to their ability to pay through progressive rates.
2) Impeding the accumulation of wealth: impede the accumulation of vast fortunes, to uphold democracy.
3) Raise revenue.

Question 22

What is an argument Lee (2007) mentions against an annual wealth tax?

Answer 22

Unless committed to improve the standards of the poor, this tax just looks confiscatory.

Question 23

What is an argument Lee (2007) makes against the idea that IHT seeks to promote equality of opportunity?

Answer 23

If we seek to achieve equality of opportunity, then we might as well abolish inheritances altogether, but this wouldn’t be permitted in a country with a home-owning ethos.

Additionally, IHT has not brought about a change in wealth ownership as currently implemented.

Question 24

What is an argument Lee (2007) makes against the idea that IHT seeks to raise revenue?

Answer 24

The tax makes such a small contribution to the revenue (0.84% of all tax revenues) that revenue considerations are comparatively unimportant.

Question 25

What other disagreements does Lee (2007) have with IHT?

Answer 25

1) Abolition would likely still yield same revenue through a ‘second round effect’, such as with VAT.
2) IHT is one of the most costly taxes to collect due to administrative and compliance costs.

Question 26

What are the current rules on IHT?

Answer 26

1) It is paid if a person’s estate (their property, money and possessions) is worth more than £325,000 when they die.
2) 40% tax rate on anything above that threshold.
3) Any gifts made less than 7 years before death count towards IHT threshold.
4) Business relief allows a business or its assets to be passed on free of IHT, or at a reduced rate.

Question 27

How much did the tax raise in 2014-15 according to Chamberlain (2015)?

Answer 27

£3.4 billion.

Question 28

What is Chamberlain’s (2015) main argument?

Answer 28

Why should some lifetime gifts be subject to CGT and not IHT and gifts on death be subject to IHT and not CGT? Forgiveness of CGT at death also encourages people to hold on to assets that have risen in value even though, absent of tax consideration, it would be preferable to sell them.

Alternative is to abolish IHT and instead have a deemed CGT disposal on death. Suggests a £500,000 gain exemption for the main residence and lifetime transfers.

Question 29

What quote does Sanford (1987) state in favour of an accessions tax?

Answer 29

“It is large inheritances not large estates as such which perpetuate inequality and an accessions tax falls heavily on the person who receives the most by way of gifts..”

Question 30

What is the main objective of death duties according to Sandford (1987)?

Answer 30

To reduce, or at least constrain, the growth of inequality in the distribution of wealth.

Question 31

What is one argument Sandford (1987) has against inheritance in general?

Answer 31

The benefit of the inheritance is usually unrelated to the effort of the beneficiaries. Money comes to them through no effort of their own.

Question 32

Why, according to Sandford (1987), would an accessions tax encourage inheritance to be spread more widely?

Answer 32

Less would be paid in the tax if the estate was more widely dispersed, and thereby reduces inequality.

Question 33

How, according to Sandford (1987) would an accessions tax, and not an estate tax, reduce inequality?

Answer 33

1) It is large inheritances and not large estates as which perpetuate inequality.
2) It provides an incentive to the wealthy to spread their wealth.

Question 34

Why, according to Sandford (1987) is it more fair to tax recipients than donors?

Answer 34

Because you tax in relation to what is received rather in relation to a sum that bears no necessary resemblance to the receipt. It also makes it easier to adjust tax to the recipient’s ability to pay.

Question 35

What is the difference between an inheritance tax and an accessions tax?

Answer 35

An accessions tax determined by the aggregation of gifts and legacies throughout lifetime.

Question 36

What is Sandford’s (1987) final judgment on an accessions tax?

Answer 36

An accessions tax is not perfect, but it is a practical and realistic alternative, which would be an incomparable improvement.

Question 37

What does the IFS (2011) state are the drawbacks on levying a tax on the stock of wealth?

Answer 37

To limit avoidance and distortions to the way that wealth is held, as well as for reasons of fairness, the base for such a tax would have to be as comprehensive a measure of wealth as possible. Very serious practical difficulties exist.

Question 38

Why, according to the IFS (2011) is it difficult to tax gifts?

Answer 38

Difficult in practice because it requires those concerned to report the taxable event. Also many ways that money can be spent on others without a direct transfer of money.

Question 39

What is the Carnegie effect?

Answer 39

‘The parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would.’

Question 40

What statistic does the IFS (2011) give about the distribution of wealth?

Answer 40

The top 10% own almost five times as much wealth as the bottom 50% put together. But argue a fair amount of this can be explained by different generational stages.

Question 41

What did the Meade Committee have to say in justification for a heavier tax burden on inherited wealth?

Answer 41

The citizen who by his own effort and enterprise has built up a fortune is considered to deserve better tax treatment than the citizen who, merely as a result of the fortune of birth, owns an equal property.

Question 42

Why might an IHT, according to the IFS (2011) not contribute greatly to the inequality of opportunity?

Answer 42

There are many drivers of inequality of opportunity that are not to do with direct transfers of wealth (e.g. education).

Question 43

What is a criticism, according to the IFS (2011), of the 100% business exemption?

Answer 43

Provides incentive to keep business going and in the family even if there are good financial reasons for disposing of them sooner. This is damaging economically.

Keeping the businesses in the family seen as encouraging inferior management practices.

Question 44

What is the ‘virtue argument’ as espoused by the IFS (2010)?

Answer 44

Unequal tax burdens on people with equal amounts of wealth: someone who receives £1m on donor’s death taxed whilst some who received £1m 7 years earlier of the event of death isn’t.

Question 45

What are the benefits of an accessions tax according to the IFS (2010)?

Answer 45

Encourages private redistribution of wealth, which is more effective in constraining the growth in inequality.

Reduces the incentive to make lifetime gifts and removes the lottery of the seven year rule.

Takes into account the circumstances of any beneficiary.

Question 46

Why is having a very large amount of wealth, according to Hills et al (2013), beneficial?

Answer 46

It reinforces economic advantage across generations and improves prospects for their own future (such as early career choices) and those of their family and heirs.

Lead to improved outcomes in education, employment and health, outcomes which can themselves lead to further accumulations of wealth.

Question 47

What does Hills et al (2013) have to say about the distribution of inheritances?

Answer 47

Over the 10 years from 1996 to 2005, 1 in 5 individuals reporting receiving inheritances, with a mean total of £35,000, but a median of £7,600. 50% of the total went to the top 10% of inheritors.

The chances of received an inheritance and its average size are greater for those who are already economically advantaged.

Question 48

What does the Conservative tradition have to say about tax on wealth?

Answer 48

1) Libertarian principle of lack of interference with people’s choices.
2) Emphasise the importance of avoiding disincentives to enterprise and the building up of assets that form the basis of future prosperity.
3) The assets are built up by someone’s own efforts and enterprise.

Question 49

What is one of the difficulties, according to Hills et al (2013), of implementing a comprehensive annual wealth tax?

Answer 49

Difficulty of collecting tax in a world of mobile capital. There is also the sheer administrative difficulty of valuing assets on a regular basis. It can also be argued that it represents a tax on the size of accumulated savings, and hence effectively a tax on savings.

Question 50

According to Atkinson (2015), how much national income was represented by inherited wealth in 2006?

Answer 50

8.2%

Question 51

According to Atkinson (2015), what practical steps might need to be taken if we had an accessions tax?

Answer 51

There would need to be averaging provisions to allow for the lumpy nature of inheritances.

Question 52

What tax does Atkinson (2015) impose on transfers of wealth?

Answer 52

Receipts of inheritance and gifts inter vivos should be taxed under a progressive lifetime capital receipts tax.

There should be a graduated structure of rates, with grounds for a top marginal rate exceeding 65%

Question 53

What are the reasons, proposed by Atkinson (2015), for an annual wealth tax?

Answer 53

The much higher level of income inequality and the rise in the ratio of personal wealth to GDP. In the 2000s personal wealth was some five times GDP.

Question 54

What, according to Atkinson (2015) might you need for governments to effectively collect a wealth tax?

Answer 54

Collective action at the supra-national level (e.g. the EU) or stronger agreements on information exchange.