The rich shall inherit the earth.
At the end of July, Bagehot, the anonymous opinion columnist on British affairs for The Economist, reflected on public attitudes there towards tax rises[i]. This was against the background of the shared Labour and Tory omerta during the recent UK election campaign on proposals for specific tax rises of any sort to ease the country’s tight fiscal position.
Bagehot didn’t suggest that there were specific tax rises that the British public would happily embrace. Rather he argued a weaker case: that they can’t be counted on to react always with reflexive fury to any new or additional tax burdens on their pockets.
He contrasted the public’s response to two separate tax measures introduced during the Tory-Liberal coalition government of 2010–2015.
First, the rise that got away. In 2010, the government…
…raised £13bn a year by increasing vat by 2.5 percentage points to 20%, its highest level ever. It was a huge rise, yet attracted little opprobrium at the time and is now largely forgotten.
Then the much tinier one that caused an immediate firestorm.
The Cornish pasty looms large in David Cameron’s memoirs. In 2012 the then Conservative government decided to levy vat on hot takeaway food such as the beefy snack. It was a measly scheme that would have raised an annual £110m ($140m; 0.005% of GDP). Outrage ensued. “Pasties,” Lord Cameron despaired. “I hadn’t even thought about pasties.” For page after page, he gaily recalls the scandal which saw headlines of “Let Them Eat Cold Pasty” and a Marie Antoinette lookalike hounding George Osborne, his Chancellor of the Exchequer.
His conclusion:
Tax rises are swallowed far more easily than people in Westminster expect.
But how a tax is collected can matter more than how much is taken. Taxes that people must pay directly from money already in their pockets are considerably more unpopular than those, like income tax, that are swiped by the government before it ever reaches taxpayers’ clutches. An example:
Inheritance tax is loathed. Only 4% of estates pay it, but many people resent the idea of it. Writing a cheque to the government shortly after a relative has died is no fun.
Maybe so. But surely, any gloom at having to pay tax on a legacy should be more than outweighed by the good cheer of the legacy itself being much larger than the associated tax bill?
Crossing the sea to Ireland, there has been a fair amount of chatter and kite-flying this summer about the alleged penal character of our inheritance tax framework, especially the allegedly miserly tax-free ceiling of €335,000 on inheritances by children from their parents above which they must pay tax at a rate of 33%.
Children receiving inheritances from parents have certainly been squeezed from two angles in recent times. First, the rate of tax on legacies above the €335,000 was increased from 20% to 33% in 2012. Second, the threshold itself has not increased for five years during which the country has endured considerable price inflation especially in property values.
The case for increasing the thresholds was made trenchantly in The Irish Times on 9 July[ii] by Neale Richmond, Fine Gael TD and Minister of State. Mr. Richmond sets out his stall early:
We have a system where those who earn the most pay the most in income tax, and this is how it should be. However, our current regime of capital acquisitions tax (CAT), or inheritance tax as it is better known, is placing an undue burden on the squeezed middle at a time when they need the State’s support.
Let’s unpick that a bit.
First, I must repeat that somebody receiving a legacy from a parent pays no tax at all up to €335,000 and only one Euro in every three above that figure. How this considerable benefit can be called a burden at all, let alone an undue one, mystifies me.
Second, that there is such a thing at all as the “squeezed middle” and that it is especially deserving of state support is simply asserted as an unassailable “fact”. If some or all of the “middle” are “squeezed” nowadays, where does that leave the lower orders? It reminds me of former EU Commissioner Padraig Flynn’s whine to Gay Byrne that managing three homes (in Brussels, Dublin and Castlebar) was so much more hardship than coping with just one.
Mr. Richmond continues in similar vein.
…many people are faced with the prospect of selling their family home due to the tax bill. No parent should fear leaving their home to their loved one because of a tax. This is not right, it is not fair and it is an undue burden on those who want to make sure their families are taken care of when they are no longer with us.
Mr. Richmond is a TD for the constituency of Dun Laoghaire-Rathdown. According to the Central Statistics Office, the median price for dwellings sold there in the 12 months to April 2024 was €625,000.[iii] That is above the inheritance tax threshold for a single child but a family of two or more children would not be liable for tax at all on the value of the property.
Any force behind Mr. Richmond’s argument is predicated on the scenario of a single “child” remaining resident in the “family home” who might be obliged to sell it to clear the tax bill. Thus, they would have to endure the sentimental wrench of having to part with the “family home” and, maybe more important, be rendered homeless as a result. No doubt too, the parent’s demise would have been hastened by their worries about the fate awaiting the unfortunate child after their death.
That attempt to clutch at our heartstrings is just waffle.
First, less than 10% of people are bequeathed a home in which they already live at the time of the bequest. Second, any beneficiary who does can be exempted from the tax liability if the home has been their bona fide principal residence for a number of years. Third, while it is assuredly never pleasant to face the loss of the roof over your head, the trauma is considerably less if you have a minimum of €335,000 in your back pocket.
Mr. Richmond ploughs on…
The CAT threshold is clearly not keeping pace with house values. An increase of the threshold at which children start to pay inheritance tax would send a clear message that Ireland is a place where work is valued and where people can stay in the family home if they so choose.
…this is a tax on wealth that has already been taxed.
Maybe Mr. Richmond sees it as self-evident that higher inheritance tax thresholds would show that work is valued in Ireland. It doesn’t seem immediately obvious to me. After all, it is not the hard- working deceased parent who benefits from inheritance, but the child who does so regardless of whether they are hardworking or feckless. In fact, Mr. Richmond’s claim is the opposite of the truth. Legacies from one’s parents are not earned by the beneficiary. They are bestowed by accident of birth. They are “free money” for the beneficiary that eases rather than reinforces the need to work as hard as they otherwise might have to do.
Incidentally, the criticism of inheritance tax as a form of double taxation is rubbish. A salary earner paying VAT on the purchase of a good or service is being doubly taxed by the same false token. Similarly, taking income tax from employees of companies that have already paid corporation tax could be termed double taxation too.
But Mr. Richmond is really making an ideological point going back to his declared sympathy for the “squeezed middle”. He is doffing his cap to the burghers of Dun Laoghaire-Rathdown. Caught between the pinching pincer of rampant inflation and “punitive” taxation, their normally natural motivation to “work hard” is flagging. It is the duty of the state to revive and sustain their work appetite by dangling bungs before them.
I venture that the following perception is widespread among the well-heeled of the affluent Dublin suburbs. The already prosperous need to be given more to keep them working to capacity — but the permanently poor should be given less (if anything) or they might not do any work at all.
We see the same mindset reflected in the concerns of the Government’s Tax Strategy Group published in July ahead of the next budget. According to The Irish Times on 23 July[iv]:
It found that the top 10 per cent of the country’s top earners (those earning more than €102,000 annually) now pay almost two-thirds of all income tax and USC while the top 1 per cent of earners (those earning €290,000 and above) pay almost a quarter of receipts (24.4 per cent).
The paper wonders out loud if the State’s tax system is in fact too progressive. “The risk is that high marginal tax rates may have adverse consequences inter alia for work incentives and competitiveness including the ability to attract inward investment linked to the availability of high-skilled workers,” it says.
Maybe the group should have been “wondering out loud” in a different direction. How fair is it that 1% of earners are being paid so much that this sleek rather than squeezed coterie are collectively liable for a quarter of all income tax? Maybe the important “risk” arising from this situation is less that these plutocrats might fly away from our shores like the swallows in autumn than that the impoverished peasantry might revolt!
In the complacent Fine Gael worldview, the comfortable co-existence of the deserving affluent and the undeserving indigent is the natural and necessary order of things. As the old song says…
It’s the same the whole world over
It’s the poor what gets the blame
It’s the rich what gets the pleasure
Isn’t it a blooming shame?
[i] British voters care less about tax rises than politicians think (economist.com)
[ii] The Debate: Should inheritance tax be cut in the budget? — The Irish Times
[iii] Residential Property Price Index April 2024 — Central Statistics Office
[iv] https://www.irishtimes.com/business/economy/2024/07/23/tax-strategy-papers-the-highlights/
