A few days before George Osborne's inheritance tax announcement at the Tory party conference, there was a gathering in Oxford of leading experts on the tax. They agreed on two key points. First, that inheritance tax could be robustly defended on moral and fiscal grounds, and second, that there was no chance any major party would seek to radically reduce it. So much for the experts.
In the wake of the government's copycat announcement that it was to double the inheritance tax threshold for couples, Polly Toynbee, who was at the Oxford seminar, wrote that it was "the week that social democracy ebbed away." Others see the government's concession as enough to bury the issue and neutralise the Tories. But rather than end the debate, this could be the beginning of a more subtle argument about inheritance.
Why is inheritance tax so unpopular? Just over half the population agrees with the statement "no inheritances should be taxed." Of course, most taxes are unpopular, but people generally recognise that they are necessary to pay for the public goods they want. Yet when researchers such as Stuart White and Rajiv Prabhakar ran deliberative focus groups on inheritance tax, they found that people's hostility barely budged. And this hostility is strongest among those who almost never pay the tax—social groups D and E.
Yet most of the standard arguments against inheritance tax are relatively easy to contest. For example: "It's a double tax." This is true of almost all taxes—we pay income tax and VAT too. And most people are shocked to learn that only 6 per cent of estates have to pay anything.
The key objection is not moral or political—it is emotional. People feel that a bequest is a personal gift within the private realm. It is part of the "economy of regard," not the economy of money. It's family. It's none of the state's business.
So the intellectual argument in favour of inheritance tax is easy to win, but this is far from the case with the emotional argument, as opponents of Bush's repeal of death duties in 2001 discovered.
In my view, the government should be in favour of both inheritance and inheritance tax. One way to square the circle is for government to encourage people to leave their wealth not to their children, but to their grandchildren and great-grandchildren. We should make available to everyone the kinds of descendants' trusts that are currently the preserve of the wealthy. And here's the twist—doing so would be powerfully redistributive.
At present, most people leave their assets to their immediate children, most of whom are in their fifties or older and get the money when they least need it. Moreover, the correlation between a parent's income and that of their child is usually quite close, but becomes less so between grandparents and grandchildren, and even less for great-grandchildren. For every generation you skip, an individual's descendants look more like the general population, regardless of how they started. There is an income-based "regression to the mean."
The baby boomers will die as the most asset-rich generation the world has ever seen, with around two thirds able to bequeath significant assets to their descendants. However fair and rational it might seem to have a welfare state that taxes this wealth at death and gives it to those who need it most, it's not going to happen. Yet if even half of today's baby boomers put their assets into descendants' trusts (for grandchildren or beyond), instead of just leaving them to their middle-aged kids, the vast majority of the future population would have trust funds large enough to set them up in life—paying for university, first houses or business start-ups. To put it another way, even taking account of assortive mating—the tendency of the affluent to marry the affluent—fewer than one in ten of the great-grandchildren of the baby boomers will lack a great-grandparent able to bequeath them at least £10,000 in today's money at the age of 20.
These descendants' trusts could be built by adapting Labour's own "baby bonds," a small bequest from the state to which every British child born since September 2002 has been entitled. Baby bonds with added cash from grandparents could pay out half their value to young people at 18, with the remainder being held as a nest eggs for their children. Furthermore, trusts with less than, say, £50,000 might be tax-free, while sums above that could be lightly taxed. For those unfortunate enough to find in 20 years' time that none of their grandparents got lucky in today's property boom, the state could expand its own contribution, funded from hypothecated taxes on the most substantial trust funds.
We shouldn't give up on inheritance tax. Instead, we should seek to extend the benefits of inheritance with the improvement to life chances that capital brings at key moments in a young person's life. A little bit of vision, perhaps with the help of an all-party commission, could make that aspiration of giving children money when they need it a reality for the majority instead of just for the rich—just as education, health and home-ownership became a reality for previous generations.
