Taxing inheritances.
I understand the Tories are about to discuss inheritance tax today
Many years ago I heard a suggestion, I can’t remember from whom, but probably the Liberal Party, which I found it very attractive.
The proposal was that inheritance tax should be charged not on the estate leaving the bequest but on the recipients receiving the bequests (note the plural.) The recipients would be able to inherit modest amounts tax free, but pay tax on big bonanza inheritances, or a multitude of modest ones.
Thus, if we define a “modest amount” as, say, £50 000 (though that’s beyond the dreams of avarice of many people) then an estate of, say £1 000 000, not all that unusual nowadays, given the price of houses, would not be taxed at all if the bequests were in 20 different bundles of £50 000, but would pay the current rate (40%?) if the whole million went to one lucky recipient.
This would go some way to reducing inequality in our society, and probably increase the level of happiness. It would also probably encourage innovation, as potential entrepreneurs would have the wherewithal for start-ups.
Monetary bequests should simply be treated as income for the recipient and taxed as income at standard income tax rates.
ReplyDeleteBequests of property not be taxed at all when they are given but when they are sold they should be subject to capital gains tax on the full gain from when they were acquired to when they are sold, ignoring the transfer of ownership due to the inheritance.
So someone who bought a house for £50,000 which is now worth £1,000,000 could pass that house to their child who could live in the house and not have to pay any tax, but if they ever sold it they would pay capital gains tax on the whole increase from £50,000 to £1,000,000 (ie, no revaluing occurs when it is transferred by will).
I've always thought this was an idea worth looking at seriously
ReplyDeleteAs you say it might encourage a wider sharing of wealth (although I doubt it would impact much on the low income families) and also stimulate consumption and then production
I'd also like to see it applied across the board - including the so-called royal family
Now there would be a policy I'd vote for
I've long thought that out whole tax system needs a rethink
ReplyDeleteIt's grown arm and legs over the decades with various govts just finding new things to tax for revenue purposes
Income tax is one place to start.
In England there are only 3 tax bands (4 if you count 0%) with a big change when you move from to a higher one - particularly from 0 to 20 and again from 20 to 40 with potential disincentives for people marginally increasing their income
The technology today means it is entirely feasible to have a much more graduated scheme where your personal tax code can be regularly updated by HMRC rather than the once a year that usually happens
Say 5% increments every few thousand £
eg £12570 0%
up to £15000 5%
up to £20000 10% etc
Automated payroll systems would have no problem with, say, monthly or quarterly adjustments
I've long thought that out whole tax system needs a rethink
DeleteYou and everyone else.
It's grown arm and legs over the decades with various govts just finding new things to tax for revenue purposes
Indeed. We should make the tax system simpler.
The technology today means it is entirely feasible to have a much more graduated scheme where your personal tax code can be regularly updated by HMRC rather than the once a year that usually happens
Wait -- you want to introduce even more tax bands than there currently are? I thought you wanted to make things simpler -- doesn't this makes them even more complicated? And for what benefit?
its more graduated so moving to the next higher one is less of a financial shock and less of a disincentive
DeleteIf I'm on a 0% band and get a pay rise/promotion of £1000 I lose £200 of that in tax which can be a big disincentive
If I'm on a 20% band the same pay rise I lose £400
its more graduated so moving to the next higher one is less of a financial shock and less of a disincentive
DeleteBut there are more bands so moving to the next higher one (and therefore hitting the higher marginal tax rate) happens more frequently.
So the 'shock' might be less but many more people will hit it and much more often. With wide bands, you might cross a threshold once every five or ten years; with narrow bands as proposed you'd be hitting a threshold every year or two.
I don't see why that's better?
For me it's more t do with the psychology and perception
DeleteI'm aware that in terms of economic efficiency 2 bands are often seen to be optimal
However, in terms of individual worker perception, to go from 0% to 20% or 20% to 40% is perceived as a big - and disproportionate - jump
That leads to the question: is it worth me putting in the extra work/hassle/time to get the pay rise when I'm going to lose so much of it.
I'd argue that some people would say "no" leading to an overall "loss" to the economy as a whole
That leads to the question: is it worth me putting in the extra work/hassle/time to get the pay rise when I'm going to lose so much of it.
DeleteI'd argue that some people would say "no" leading to an overall "loss" to the economy as a whole
Yes, I get that. But surely some people will also ask 'is it worth me putting in the extra effort if I'm going to go from 10% to 15%?'
And some of those will answer, 'no'.
Now, intuitively it seems obvious that fewer will say 'no' to a jump from 10% to 15% than will say 'no' to a jump from 20% to 40%.
But there are many more of those jump in the new system.
So: a bigger jump affects fewer people, but more of the people it does affect will say 'no'.
On the other hand, fewer of the people affected by a smaller jump will say 'no' -- but there will be many more people affected by the smaller jumps.
Which leads me to ask: how can you be certain that the two effects -- smaller jumps leading to fewer people at each jump point saying 'no', but more jump points meaning more people are faced with the question -- won't basically cancel each other out, and leave you back basically where you were before?
Because if they do cancel out, then you have just incurred the expense of complicating the system for zero gain, which is a loss.
Even if they don't cancel out, you would have to be sure that the gain you get from fewer people saying 'no' would more than cancel out the loss from the costs of making the system more complicated, in order for the policy as a whole to show a gain.
So again: how can you be sure that the 'fewer people saying "no" at each jump point' effect will be sufficiently greater than the 'more people facing jump points' effect to make the policy change worth it?