Arguments for new wealth taxes simply don’t add up

Barack Obama will publish his latest budget proposals this week and will follow up his combative state of the union address with more proposals designed to infuriate Republicans. Chief among these ideas, none of which will be implemented, are reforms to inheritance taxes. Obama thinks Americans should start to pay death duties. Republicans in control of Congress are apoplectic.

At present, anyone who pays estate taxes in the US either has a very poor accountant or, like Warren Buffett, believes there is a moral imperative for the wealthy to pay taxes when they die. The system is complicated (Obama doesn’t seem to want to change that) but essentially means that anyone who dies with less than $5 million (€4.4 million) in assets doesn’t pay any death duties. Married couples are allowed twice that. Very wealthy people get around these generous limits by giving away their assets before they die. Obama doesn’t stand a chance of getting any of this changed but is trying to lay down a marker should the Democrats ever regain power in Congress.

Voluntary affair

Similarly, in the UK, inheritance tax is mostly a voluntary affair. About 500,000 British citizens die each year; around 16,000 of these, just over 3 per cent, pay estate taxes. Although current thresholds for paying tax are a lot lower than in the US, there is similar scope to avoid tax altogether by giving away assets while still alive.

Unlike Obama

,

David Cameron

would like to raise tax thresholds significantly. This would, to all intents and purposes, eliminate death taxes completely, bringing the UK into line, more or less, with the current US position.

Lots of people think that the way in which capital gains tax interacts with inheritance is a form of double taxation. Given the ease with which individuals can quite legally avoid at least one of these taxes (in the US and UK), it would seem that this is more a theoretical rather than practical issue. Nevertheless, this has not stopped the UK Institute of Directors (IoD) from proposing that capital gains tax and inheritance tax should be merged in order to prevent wealthy people from being taxed twice on assets. The IoD described the current UK system as “monstrous”.

Closer to home, there is no debate about these issues at all. Little interest is taken in the fact that tax-free thresholds for gift and inheritance taxes have halved over the last few years. It is important to stress the "gift" part of these wealth taxes as there is little scope in Ireland, unlike elsewhere, to avoid death duties by giving away assets while still alive. The magic numbers at which the wealth tax kicks in are €225,000 for gifts or legacies to children and a measly €15,000 for non-relatives.

There is no reason why we should have a similar inheritance tax regime to the UK or the US. Our punitive tax regime represents the choices made by our democratically elected representatives. Just like corporation tax. But the repeated calls from the usual suspects for Ireland to introduce wealth taxes is a dishonest way to frame the debate. It is also innumerate.

Wealth taxes

We already have lots of wealth taxes. The much hated and unfair pension levy is but one example. Property taxes are another. All forms of taxation on capital are wealth taxes. Capital gains tax is another levy that has risen significantly over past few years. Gift and inheritance taxes complete the picture: one way or another, our taxation of wealth is pretty comprehensive. If you have wealth, the system will tax that wealth, sooner or later.

Politicians and commentators who persist in calling for the introduction of wealth taxes are being disingenuous. And not just because they ignore, or are ignorant of, existing taxes. Because of the various ways we already tax wealth it is unlikely that new taxes would raise much money. That is the sense in which these ideas are innumerate. And irrelevant.

The underlying problem is corporate taxation: if you don’t tax profits, then something else has to make up the difference. That results in a system that bends over backwards to assist large, usually foreign, multinationals. And penalises the efforts of small, usually Irish, firms.