Inheritance Tax

But if you only have investment income, it is taxed more heavily than earned income, because it is not possible to reclaim tax credits on dividends from income below the tax threshold.

Or are you worried about NICs? The answer is to be over 65.

I specifically said "from the point of view of the benefits to the recipient" so the differences you cite are not relevant.

You seem to be implying in the above that a taxation system should bear primarilly on wealth creators. I think this is an unconventional view and not one that actually applies in reality since we also tax wealth consumption, capital-gains and of course inhertitances.

For my part I think the burden of taxation should be distributed in a manner that is fair and equitable. But I'm under no illusions that this is going to happen since there are too many vested interests.

Take the case of Mr A and Mr B who live next door to each other and have similar families. Mr A is a lazy sod who's never done a day's work but is fortunate enough to inherit 250,000 from his mum from which he draws down

25k a year for 10 years. Mr B receives no inheritance but works to earn 25k a year. Now from their respective "incomes" Mr B pays much more tax than Mr A - who pays no tax at all on his "income". Mr B is now effectively paying for the education and health provision etc for the A's.

This does not seem fair or equitable to me and no amount of accounting jargon can change that.

Fred

I do understand that accountants have to take a very formulaic approach to finances - it clearly reduces the risk of error and misunderstandings.

However this discussion is (intended to be) about the issue of fairness in taxation and in that context I think it's perfectly reasonable to look at the movement of monies from the pov of the benefits they confer. So receiving 250k (say) from a gift, an inheritance or from an employee is equivalent.

I think the overriding principle of taxation should be that it falls fairly and equitably across society. On this basis it seems to me that all these different ways of acquiring 250k should be equivalent from a tax liability pov.

Fred

The reason it is not equivalent is that if you invest capital and earn interest or dividends, or if you work for your money, the benefit is not yours alone, but is mutual. Your employer benefits from the work you do, the company or bank you invest in uses your capital to their own advantage. There is positive benefit on both sides, and in fairness the scenario should be taxed wihtout it mattering much how the tax is split between the two sides. The salient point is that the net benefit is positive.

With a gift, on the other hand, although the donee benefits by receiving the money (or other form of asset), you seem to forget that the donor has an equal but negative benefit, as a result of "losing" the money (dealing as we are in "hard" value, we can't really count as a "benefit" the warm feeling the donor gets from helping the donee). Applying the same principles as above, it should not matter how the taxation is split between the two, but it should be based on the *net* benefit. But this net benefit taking donor and donee together is NIL, and so it is unfair to tax this scenario at all.

Rubbish.

Firstly, Mr A's mother paid the same tax while amassing her £250k as Mr B is paying on his 10 years' £25kpa. More, in fact, since her £250k is net of tax and his £250k is gross. Even more if her, or more likely her husband's, past earnings were taxed at the higher rate, which Mr B's clearly are not.

Secondly, why draw an artificial boundary between Mr A's immediate family and his mother? Surely he is part of his mother's family. What business is it of anyone else how the money is spent within this wider family, or what business is it of anyone else whether she spends the money on herself or on her son, or, if on her son, whether she does so by giving it to him before or after she dies?

Are you proposing to tax the benefits which accrue everyday to Mr A's and Mr B's wives and children as a result of these men supporting their families (i.e. sharing their money)? Of course not. So why should not Mrs A Senior support her family with impunity?

And what's wrong with that, given that Mrs (or Mr) A Senior has already paid for the B's?

Of course no jargon can change how things seem to you. But things are as they are for -on the whole- good reasons to do not only with fairness but with compromises. No system can be completely fair, especially because fairness is in the eyes of beholders who all have different ideas about what's right and wrong.

It's not your fault that you have the wrong attitude. :-)

You're a cruel bastard for failing to recognise that Mr A's "laziness" is really an illness making him unfit for work. He and his family should therefore be entitled to state benefits, and the state should be grateful that as a result of Mrs A Senior's generosity Mr A will not now need to draw upon the meagre state resources for this support.

But had the state taxed this support, Mr A would probably need to draw on those resources after all. So it's just as well, innit?

This implies that you think a fair taxation system is one which is based on how much wealth you create rather than how much you wealth you possess? Such a system creates ludicrous anomalies where people with vast fortunes pay less (sometimes absolutely less) tax than those of modest income.

I on the other hand, believe that a fair taxation system should be based on ability to pay. And in particular, we should regard any increase in personal wealth as a form of income from a taxation point of view.

And of course, from a market perspective, shifting taxation away from wealth creation could have a stimulating effect on the economy.

It's the use of the word _unfair_ in this context that I find confusing. What is unfair in expecting someone who's personal wealth has just increased significantly to pay more tax?

Fred

I don't know what's fair, and I'm not really clear about what exactly wealth creation means, but yes, I think a tax system based on what you earn, as opposed to what you have, is probably the least unfair of the bunch.

Why is that anomalous? If you tax wealth as opposed to income, then this creates a general disincentive to amass wealth. People will have no reason to work harder, to seek more income, than they need just to get by. If they earn more than they spend, it will be taken away from them. What use is that? Don't forget that the income which was used to build the fortune has already been taxed. Why should it be taxed again for no other reason than that it has not yet been spent?

It should be based on ability to pay *from income*, not from capital.

But then you must equally regard any decrease in personal wealth as a form of negative income, deserving of a tax refund. Hence a simple transfer of wealth from one individual to another should be tax-neutral.

How so? And why would this be good? Don't answer that. I don't want to get sucked into a discussion about economics, a field I do not understand. But why should a taxation system be driven by a market perspective? What has fairness to do with markets?

Nothing, so long as you also expect the person whose wealth has decreased to pay less tax, or even get some back. But it's simpler just to let the two cancel out and just not bother taxing transfers.

Here's another scenario for you.

Suppose you buy a brand new car. Then included in the price you pay is tax which will be levied on the dealer, the manufacturer, and their employees. But if you then sell it second-hand privately to me 3 years later, then part of the price I pay will compensate you for some of the tax-earmarked money you gave the dealer, and the rest will compensate you for part of your capital outlay, the rest of which you write off as depreciation, basically the equivalent of "hiring" the car for 3 years. I'd be interested to learn your view on whether you think that an additional tax should be levied on you for the money you get from me for the car.

If you're consistent you'd have to say yes, this counts as your "income", even though what I would say is that your balance sheet hasn't really changed. You'd have lost an asset worth £X but gained £X in cash, so your net worth would have gone neither up nor down, so I'd say you should be taxed.

So how is this different from you buying the car new? Because from the dealer/manufacturer's point of view you paid them more money than the car was "really" worth, so that they've made a profit, and it is only this profit which is taxed, not the underlying neutral transfer of value. Likewise, as far as their employees are concerned, their wages are essentially 100% profit to them, so they are taxed too.

Does this mean I can deduct 40% tax from pocket money for the kids and save some by not telling them or declaring it?? :)

Mat

"Fred" wrote

Nope - the education/health provision is paid for by both Mr B *and* Mr A's mum (or whoever she may have inherited her fortune from...).

I'd agree that taxing savings themselves (as opposed to the income they produce) is not fair since it penalises the prudent. However I still can't follow the logic of distinguishing (from a taxation pov) between different forms of income - e.g. earnings, gifts, legacies, interest.

All of these forms of income (or asset increments if you prefer) form part of your ability to contribute to the taxation system. Therefore a taxation system which is truly based on a the principle of ability to pay will regard them equally. Of course, a taxation system is also a tool for social and economic management and so we might want to layer other factors on top of that principle - such as reduced taxation on earned income to reflect its greater benefit to society.

Yes, I agree with you on the whole and I really hadn't intended to suggest that wealth itself should be taxed. The tax liability should arise at the point where the wealth is acquired - irrespective of the mechanism of acquisition.

I don't agree at all. In this context, donating money is simply a form of spending and we don't generally give tax credits for that. Indeed, we usually tax spending - especially of the discretionary sort.

You seem to be stuck in a balance-sheet mindset here. The first thing you have to note is that taxation doesn't net out to zero. It's a real price that has to be paid by society and the only questions are what is the fairest principle to apply in distributing the burden and what are the most effective mechanisms for applying it. I think I'm fairly fixed in my view on the frst question (ie ability to pay) but I'm much more flexible on the second.

To answer your question directly though. If you sold the car at a market price then I don't see that your net assets have changed at all and therefore there should be no tax liability. You may regard the taxation on the purchase of the new car as a relevant factor but I would consider the whole question of sales/purchase tax as being a separate issue - a mechanism question rather than a principle question.

see above

If this was really the case then the taxation would be related to the car manufacturer's and dealer's profitably - which (afaik) it isn't. What's more, in today's competitive market the tax could be over 100% - which contravenes natural justice.

In reality of course, car tax is just another form of purchase tax like fuel tax and VAT. I can see the advantages of these taxes as tools for social/economic control but I'm not entirely comfortable with them.

Fred

Nope, the taxes paid during the creation of the original wealth were used to pay for the education/health provision at the time it was created. In this case it would include some of the cost of educating and caring for Mr A - but not his kids.

You seem to regard taxation as some sort of one-off entry charge. It isn't, it's the ongoing bill that has to be paid for running a civilised society and it's only fair that it should be related to ability to pay. In my book that means that we should tax income whatever it's source.

Fred

So, when your mate borrows twenty quid from you - he has to pay tax on that? Then, later, when he repays you - you have to pay tax on the returned money...??!

...

"Fred" wrote

In this regard, you could just as easily say that your "net assets" at the start of the working-year include hours of your time. When working, you exchange these hours for your wages. The hours, after all, have been 'sold' at "a market price" - and hence your "net assets have [not] changed at all".

Before working, you had less money and more 'potential working hours'. After working, you had more money and less 'potential working hours' - net result the same, so according to your above logic all wages & salaries should not be taxed?!!

"Fred" wrote

Where on earth did you get that from?

"Fred" wrote

And how do you calculate "income"?

If you use your "change in net assets" method - then it certainly is *not* "related to ability to pay" !!

Don't be silly, loans are not gifts. They don't directly change the net worth of either party.

I'm begining to see where the term "creative accounting" comes from ;-)

You're scaping the barrel now though. How do you propose to place a value on "potential working hours" - can they be banked or rolled forward ? What rate per hour would you assume? If *your* logic is correct then someone who doesn't work for a year (say) ends the year in debt to the tune of the lost hours (in addition to any other debts). Can you tell me to whom this debt is owed?

In one sense though your argument does carry some weight and that is on the receipt side of the tax equation rather than the debit side - you'll not find me arguing strongly against workfare.

But before we shoot off into some economic 5th dimension, can I just repeat my simple contention that taxation should be related to ability to pay rather than the source of your income. And yes, by income I mean all of the monies that come in (in-come) to your coffers.

I don't think this is too different from the way we tend to share liabilities in social and family settings so I really don't see it as revolutionary or strange.

Fred

You seemed to be implying that Mr A's mum had bought a get-out-of tax card for all future generations of the A's so long as they just continued to live off mum's legacy.

How so? Maybe you're thinking of liabilites as well as income - I'm certainly not arguing against all tax credits. Do you have any examples, perhaps I've missed something.

Fred

"Fred" wrote

No need - as they aren't being taxed (under your model), you don't need to know their value.

"Fred" wrote

You can use the rate you are paid / charge, if you like!

"Fred" wrote

There is no debt. He just has lower *assets* !

Perhaps you'd understand it better if you consider that, effectively, the non-working person is simply buying their own working hours. They pay themselves (any rate, be it 5 per hour or 500 per hour) - which of course means that no money really changes hands (if you like, they can pass a fiver from their left hand to their right hand - or vice versa - a few times, but it really isn't necessary).

"Fred" wrote

So - you wouldn't tax capital gains, then? When an asset that is held increases in value, there are no "monies" coming into your coffers. Also, the increased value does not provide "ability to pay". Further, you have already stated that you would not tax selling an asset at market value (the car example) - so you aren't going to tax the (earlier) increase in value at the (later) time of sale.

"Fred" wrote

They do, in respect of the *capital* of the legacy - not the *income* from it. [Assuming it is under IHT threshold.]

"Fred" wrote

Suppose you have several houses (or anything else, for example rare antiques or valuable oil paitings), which increase in value - so "change in net assets" is significant. Just because they are valued at a higher amount, doesn't mean you can *afford* to pay tax on that *un*-realised gain ...

[ ... unless you sell the asset - is that what you are suggesting? People should sell their assets all the time just to pay for tax which they can't otherwise afford?? ]

Couple of points

I don't think that the more wealthy can better avoid IHT because "they can afford tax avoidance schemes". I don't imagine tax avoidance schemes are expensive necessarily. Maybe they can avoid it more effectively because by their nature they're more interested in understanding finance.

Overall the government needs to raise a specific amount of money for managing the country. The real question is where should they get it from, and in what proportion. If they raise the IHT level, then they have to increase tax somewhee else.

(becoming more efficient has never worked in the past!) ..........

I phoned a tax advisor (from yellow pages) & asked how much he'd charge to answer some of my tax questions He replied "£100 per hour"

Tony

Fwiw, yes, I'd certainly tax capital gains. When an item appreciates in value beyond inflation then that's surely as much of an increase in net assets as interest on savings - leaving aside liquidity. And of course the increase in value provides an increase in your ability to pay tax - why wouldn't it?

What about council tax? Do you think someone living in a mega-pound house with few liquid assets should be exempted just because they can't put their hands on the readies?

I don't know what the most effecient mechanism for tax collection is but I do know that fairness and equitability should be the fundamental driving force and to me that means ability to pay - including your "potential working hours".

One of my worst nightmares is a country in which half the population effectively lives mostly off the legacies of their parent's estates - and hence on the backs of the other half of the population. This to me seems like a form of modern slavery. Hopefully the long awaited property crash will lessen that particular danger.

Yes, I know life's not fair, but lowering the inheritance tax threshold or removing it completely would make it a whole lot fairer imo.

Fred