27 February 2024

The death of the death tax would not be mourned


‘Nothing else in the world… not all the armies… is so powerful as an idea whose time has come’. Clearly, Victor Hugo never envisioned the power of Treasury brain.

Despite the manifold reasons as to why inheritance tax should have died long ago, HMT’s apparent allergy to dynamic modelling means that the taxman still inserts himself into a family’s grief at the most heartless of moments. The ethical arguments are well-established, and for every pundit who thinks they know better, polls put the death tax as comfortably the least popular in the country amongst Great Britons. The promise of abolishing it by George Osborne was enough to scare Gordon Brown off calling an early election, and it remains a moral stain on our tax code.

But let’s get down to the economics. A new report from the Adam Smith Institute outlines just why we have been calling for the abolition of this iniquitous death tax for decades.

In static terms, the death tax takes a pretty small proportion of the tax take – a mere 0.89%. It is already perverse to describe tax cuts in how much they will ‘cost’ rather than reflecting on what it would do for individuals, families and businesses if they actually got to keep more of what is theirs.

But as I mentioned, the Treasury is pathologically fearful of coming close to dynamically modelling second order effects of tax cuts. You have to wonder why; when account is taken of the impact on other taxes and on economic activity, the yield of inheritance tax to the Treasury may well be zero or negative. Indeed, the yield of estate duty may well have been negative in each of the 130 years since its introduction in 1894.

It has also certainly added to increased unemployment, and distortions caused by inheritance tax will likewise have deleterious effects on economic activity by skewing capital and energies away from productive work towards avoiding paying the duty. Even the forms that must be filled in have almost quintupled from 23 pages to 118 pages since the nineties.

Further, the way the death tax is structured encourages individuals to invest their money into less productive areas of the economy, rather than investing in companies and capital.

There are other negative effects that are caused by the death tax that straddle the economic and the social spheres (as of course most things do). Heritage assets and family firms know that familial bonds in business are actually very powerful in helping to generate quality. As Patrick Collison recently said on the Dwarkesh podcast, going into business with loved ones is currently undervalued. (He should know; his company Stripe was founded with his brother John and has made the pair the youngest self-made billionaires in the world.) But the death tax can destroy those wonderful stories of familial, human success. One way it does this is by scaring owners off giving employees of unquoted companies an interest in these companies as shareholders.

These effects are obvious to any Brit who is just trying to pass on his or her life’s work to their children and out of the hands of the grasping, wasteful leviathan that is the modern state. There is more than enough evidence available to persuade the Treasury to look into how much money the death tax really brings in after these horrid side-effects are factored in. Once we realise how little it really brings in, the final support strut of this wicked tax will be gone. Its death will not be mourned, unlike all the human efforts lost to its cruel design.

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James Price is Director of Government Engagement at the Adam Smith Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.