People like the myth of the ‘self-made’ man or woman. Donald Trump, for example, appeals to his followers as an ordinary guy who built his business empire with only a “small loan” of one million dollars from his father. The truth, however, is that Trump received upwards of $400 million from Fred Trump over his lifetime. The point being: it’s much easier to make money if you start rich.
Wealthy people have inbuilt advantages over the less prosperous: they can afford better education and healthcare, they have easier access to capital if they want to start a business, they have greater opportunities and better life chances. Most people are comfortable about wealth disparities in society, as long as the game feels fair (i.e. they accept unequal outcomes as long as there are equal opportunities).
In 2018, when we spoke to Adrian Wooldridge, a British journalist and columnist for The Economist, he argued in favour of inheritance taxes as a way to keep the game fair:
[…] We’re seeing extraordinary concentration of wealth in the hands of a few people. There was a day last week when Jeff Bezos’ wealth increased by more $1 billion in a day. You have these gigantic Silicon Valley fortunes. I would say [we need] an inheritance tax. That means that some of these giant fortunes don’t exist forever.
What do ours readers think? We had a comment from Kimmo, who argues that inheritance tax is a form of double taxation because the income has already been taxed at the point it was first earned. Why should it be taxed again?
To get a reaction, we spoke to Karlyn Bowman, Senior Fellow at the American Enterprise Institute, a conservative think tank based in Washington, D.C. How would she respond to Kimmo’s comment?
That’s certainly what American public opinion suggests; they do believe it is double taxation and that Americans shouldn’t be taxed a second time. So, that’s where the American public is on that issue overall, and that’s been true historically; we’ve had a lot of [polling] in the United States about inheritance taxes, and they just are not popular. And it’s not because most Americans think they themselves will be wealthy or are going to be wealthy – they don’t – but they think it’s possible for their children, and they don’t want to see that inheritance taxed twice.
For another perspective, we put the same comment to Adam Corlett, Senior Economic Analyst at the Resolution Foundation, an independent British think tank established to improve the standard of living of low- and middle-income families. How would he respond?
Firstly, there are lots of ways in which double taxation can happen: for example, we have income tax in most countries, and then people also pay VAT or other consumption or transaction taxes, or one person can pay tax on their income and then use that income to pay other people, who then pay tax on that income, and so on. So, it’s hard to pin down exactly what ‘double taxation’ is and why it’s a bad thing.
Secondly, I think attitudes towards inheritance tax depend a lot on whether people view it as a tax on giving or on a tax on receiving the money. If you view it as a tax on the recipient then it seems quite reasonable to me; we tax people when they receive money for working, so it’s only fair that we should tax people when they receive money by virtue of inheritance.
Next up, we had a comment from Duncan, who said that when a wealthy person inherits money they can invest it into making them (and their children) even more advantaged, meaning that inequality perpetuates. Is this a problem?
How would Karlyn Bowman from the American Enterprise Institute respond?
Yes, I think that it is true that inequality is perhaps getting worse in the United States overall. There are many different ways to calculate it, but again people with very large fortunes can pass that along to their children and grandchildren, giving them an exceptional advantage overall.
That said, Americans are not confident that government knows enough about how to address inequality. One of the pollsters has asked a question three times that asks Americans whether the federal government should be involved in trying to reduce inequality, or should the federal government stay out – in part because the government doesn’t know enough about how to do this – even if inequality gets worse. And in all three of those questions you have a very divided public in the United States with the weight of opinion being very barely on the view that government doesn’t know enough about how to address inequality. People know that it’s real, and that it’s serious, and that it’s growing, but they’re just not sure the federal government can do a lot to address it through taxation and other means.
Finally, what would Adam Corlett from the Resolution Foundation say?
I think inheritances certainly do pass on some inequalities from generation to generation. Especially in the UK, the very richest might have been rich for many generations, and for a lot of people in the UK their chances of buying a house, for example, are increasingly dependent on their parents’ wealth and their grandparents’ wealth, so that’s definitely not good for social mobility.
I think another problem is a sense that the very richest don’t actually pay inheritance tax. So, even within inheritance tax people on medium-to-high incomes might feel that they are actually paying more inheritance tax than the very richest, who are able to organise their affairs so they pay less tax. That’s partly what’s caused a lot of resentment about inheritance tax in the UK, so it’s important that any inheritance tax system is progressive both in theory and in practice.
Are inheritance taxes unfair? Does it represent a form of double taxation? Or is inheritance tax an effective way to reduce inequality? Let us know your thoughts and comments in the form below and we’ll take them to policymakers and experts for their reactions!