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Inheritance tax debates overlook the psychology of the thing

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On top of indistinguishable cultures and politics, what else do Russia, Portugal, Mexico and Canada have in common? None imposes inheritance taxes.

Joining their ranks is one idea that the UK government is supposedly mulling over in order to save its electoral bacon. Cue wails of joy and despair from the usual suspects on the right and left.

Which is odd — as I jest above. Because when you run your eye down the countries that do not raise a penny via death, or alternatively those that do, they differ enormously within each list.

Some nations that otherwise love fleecing their subjects, as measured by tax revenues to output, don’t impose an inheritance tax. Sweden. New Zealand. Norway abolished it in 2014. Australia did so when I was in shorts.

Conversely, there are countries usually associated with competitive tax regimes, such as the US or Ireland, that have some of the highest inheritance or estate tax rates.

Meanwhile, the world’s biggest democracy — India — has a zero rate. So does the world’s biggest one-party socialist republic, China. Together with Russia, that’s more than a third of the global population. And these nations couldn’t be more different.

Clearly, then, inheritance taxes have nothing to do with politics any more. They did once — Karl Marx believed they should be levied at 100 per cent. Why do they still evoke such strong feelings?

In Britain, for example, a recent Ipsos survey showed that inheritance taxes are considered the most unfair of all taxes. Twice as bad as duties on booze in fact, which is saying something — especially as less than 4 per cent of deaths in the UK result in an inheritance tax charge, according to the most recent official data. For comparison, 60 per cent of adults drink alcohol every week.

Likewise, inheritance and estate taxes (the former is paid by the recipient, the latter by the corpse) generate near-nothing for governments because they are extremely progressive, riddled with exceptions and the rich mostly avoid them.

They account for less than 1 per cent of tax revenues in the UK, meaning that five years of receipts wouldn’t even pay back the money wasted on the Covid-era test-and-trace programme. In America, federal estate taxes make up only 0.4 per cent of revenues.

Still, that is more than enough to buy one Gerald R Ford-class aircraft carrier, if that floats voters’ boats. Better yet, only about 2,500 estates would have to pay. Indeed, just 370 of the largest US estates accounted for $11bn of the $18bn raised in 2021.

Either way, the amounts raised are rounding errors and few people ever have to bother with inheritance taxes. So something deeper must explain why we even bother talking about them, let alone loathe them.  

One response is that inheritance taxes grate because they are a form of double taxation. The deceased have paid taxes their whole lives. It is unfair that mum or dad should be taxed again.

But this argument is nonsense when applied inheritance taxes (although it holds for estate taxes which are paid pre-distribution). The recipient is being taxed on this money for the first time.

Another reason why inheritance and estate taxes are unpopular is that people know they are wealth taxes by another name. And if a government can tax your wealth the moment you croak, why not a year before, or throughout your life?

There are reasons why wealth taxes make sense. But they are a hard sell as presidents Emmanuel Macron and Joe Biden appreciate. Here in Britain, the Labour party has ditched them too. But France, the US and the UK have a wealth tax already — it’s just that it’s triggered by death.

Which brings us to the psychological core of the issue. However irrelevant inheritance taxes are in the economic scheme of things, they excite us due to their close association with two themes that dominate our lives: mortality and family.

You could take the view of 19th-century US industrialist Andrew Carnegie. He believed in the moral duty of estate taxes to “produce the most beneficial results for the community”. It is the least a millionaire can do after a “selfish . . . unworthy life”.

Perhaps. But the rest of us are less keen to give everything away. A more powerful force is what is sometimes called symbolic immortality — the connection across time between generations and what they leave behind.

As Mihaly Csikszentmihalyi and Eugene Rochberg-Halton, explain in their book The meaning of Things: Domestic Symbols and the Self, we all yearn to live forever in the minds of our loved ones and beyond. Immortality is manifested in physical things. 

Maybe a photo, a favourite chair, the family home or a million-dollar trust fund. Assets handed down have psychic and emotional worth far beyond their monetary value. When politicians tax these symbols, we feel genuine grief.

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