Inheritance tax does immense economic damage, according to Barry Bracewell-Milnes, an expert on tax reform, in a new paper written for the Institute of Economic Affairs. The tax yields little revenue, the costs of collection are high and large numbers of people of modest means - especially those with houses in the South East - have been swept into the inheritance tax net because of the rapid rise in house prices compared with the much smaller increases in the inheritance tax threshold. Many of them probably do not realise their estates will be subject to the 40 per cent tax.
Dr Bracewell-Milnes begins by setting out the traditional abolitionist case: the administrative and compliance costs are high; the Treasury may lose revenue, on balance, because it would have collected more from other taxes if the revenues had remained in taxpayers' hands; the tax is disproportionately heavy for small and medium sized enterprises; and it shortens time horizons. But he adds novel arguments of his own.
His main concern is the adverse effect of death duties on 'perpetual saving' - saving which is never drawn down. The perpetual saver enjoys his abstinence from consumption and at the same time provides resources for the rest of society: thus he is a public benefactor. Death duties strike at the root of this form of saving. They make saving in perpetuity more expensive for the testator and so reduce this form of saving and the benefits it confers on society.
Far from reducing inequality, as is sometimes claimed, Dr Bracewell-Milnes argues that death duties tend to increase the observed inequality of spending and lifestyles. He points out also that social changes are undermining the basis of the present exemption from tax of transfers between spouses: if homosexual pressure groups obtain a similar exemption for same-sex unions there will be an 'unprecedented test of public tolerance.' (page 91)
He concludes that death duties should be 'put out of their misery'. Abolition would be simple and would have little effect on government tax revenues.
'inheritance tax does immense economic damage and is perverse and counterproductive for its own ostensible purposes, egalitarian or otherwise.' (page 94)