Inheritance tax

The chancellor recently increased the tax threshold for inheritance tax to £600,000, for married couples. This was widely seen as a popular move; in effect the government were merely stealing a popular idea of the Conservatives. There was little if any support for the benefit of an inheritance tax, which is strange when we consider the nature of inheritance tax.

Inheritance of wealth exacerbates inequality in society.
Inheritance of wealth creates disincentives to work. If young people inherit large sums of money then there is the potential for them to avoid working.
A tax on wealth is efficient. An efficient tax is one that doesn't distort the workings of a free market. For example, an income tax may discourage people to work. A tax on goods creates disincentives to buy them. But, generally speaking a tax on inheritance does create disincentives, in fact the opposite can occur.

• An inheritance tax may force people to sell homes, but, this is not necessarily a bad thing. It helps to avoid inflated house prices. If 50% of the population were to inherit a house, it would mean that the other 50% would have great difficulty in buying a house, creating inequality.
• Equality of opportunity. The social philosopher John Rawls, suggests that the best outcome for society is one where we would be equally happy to be born in different circumstances. Large inheritance enables people to have inequitable opportunity.
• Removing inheritance tax means other taxes will have to rise. (the governments proposed tax on foreigners will not meet the £2 billion loss). People don't like inheritance tax, but, they will dislike, even more, the other taxes that have to be increased as a result.

• Inheritance tax may confuse even more

Labels: taxation

Apologies for the predictable tabloid headline

But, a rubbish tax is an interesting dilemma. I often written in favour of taxes for goods which create negative externalities. For example, cigarette tax, obesity tax. But, do these argument apply in the case of rubbish?

Arguments for a tax on Rubbish.

• Rubbish imposes costs on society such as:
  
• There is a shortage of landfill sites.
• It is expensive to dispose of waste. A tax means people are charged for the external costs that they create.
• Rubbish incineration also causes environmental costs such as greenhouse gases. Rubbish in landfill sites also causes pollution to rivers and water table.
• Without a tax there is no incentive for people to reduce the rubbish that they create. This creates a moral hazard. It means people who don't recycle and seek to reduce their waste are given no penalty. Arguably this is unfair on those who do try to reduce their waste.
• Raises revenue for the government which enables better quality refuse collection or to lower other taxes (although the tax raised is likely to be quiet small.)

Arguments against a Tax on Rubbish.

• It is expensive and difficult to collect the tax
  
• It will encourage people to flytip. This is a nuisance and expensive for the council to deal with.
• Could encourage poor sanitation as people leave rubbish illegally.
• Discriminates against big families. - They are more likely to have to pay. But, you could argue that a family of 5 should pay more than an old lady in a household of 1.
• Unfair. Takes a bigger % of income from poor people. True, but, this is not necessarily a reason to stop the tax, if equality is a real concern other taxes and benefits can be adjusted to compensate from the small increase in inequality.
• Will cause resentment at another tax. - Not an economic argument but likely to be a practical factor.

Conclusion.

As an economist I agree with the principle of a rubbish tax. It is good that people are charged for the social costs that they create. I think the tax will help reduce excessive garbage. I also feel companies should be taxed for using excessive packaging (but that is another debate)

However, In practice, I think the tax will be difficult to implement. The hassle of collecting taxes and avoiding tipping may equal or outweigh the relatively small gains of the tax. The problem of flytipping is a serious concern.

If a rubbish tax is introduced, I won't complain. But, it would be a 'courageous' politicians who came out strongly in favour of a rubbish tax.


See Yes Minister for a delightful explanation of a ' Courageous' political decision.

"Very courageous minister" - civil servant

"what do you mean "courageous" ? - Minister

" I mean it is electoral suicide, minister" - civil servant

Labels: taxation

Recently I wrote a piece arguing for higher taxes on unhealthy foods. This obesity tax has several main justifications including:

• Help to encourage healthy eating
• Pay for the externalities of obesity
• Raise revenue for government.
• Help save lives and improve quality of life.
• See: Fat tax on unhealthy foods
  

An interesting report from the Independent shows that higher petrol prices have had a dramatic effect on encouraging Americans to walk to shops, rather than drive their 3 ton hummers 500 yards to the nearest McDonalds drive in.

Rising Petrol Prices hit Obesity

This is great news and these kinds of trends should be encouraged by government intervention.

What do you think? - Should the government tax certain activities? Is it the government's responsibility to tackle obesity?

Related

• Arguments for Electronic road pricing

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Why We should increase Tax on Airplanes and Air Flights.


1. The Social Cost of Flying is much higher than the personal cost.

The external costs of flying include:

• Pollution leading to global warming.
• Noise pollution from nearby airports.
• Decline in British sea side resorts
• Damage to Foreign holiday resorts like the The Galapagos islands, where many other rare habitats are under growing threat.

The economic and social cost of flying is much higher than alternative forms of transport such as trains. Therefore, there is a good economic reason to tax air-planes. The money could be used to subsidise trains and other forms of more environmentally friendly travel.

2. Raise Tax Revenue.

This means other types of taxes can be reduced. Or the tax can be used to subsidise other types of spending.

3. Air Travel is a luxury good. Travel to foreign countries is rarely a necessity. Foreign holidays are a luxury good. Demand has increased more than proportionately following increased economic growth. Therefore, there is no harm in reducing the demand of this good.

Alternatives to Taxing

1. Limiting the number of flights from airports and limiting the number of airports.

This artificial restriction in supply will have the effect of increasing the price and therefore, reducing demand. Taxes have the same effect except the government get the revenue.

2. Make Airplanes more environmentally friendly.

Fit more people onto a plane. For example, some airline companies are suggesting standing room tickets. These flights will be more environmentally friendly. It is also possible the development of some fuels will be more environmentally friendly.

• hidden costs of airflights
• Why we should tax unhealthy food
• Advantages of Electronic road pricing
  

Labels: taxation

If a government could introduce a relatively painless way to prevent 3,000 lives being lost through terrorist action, do you think we would hesitate to introduce such a policy?

A report by the University of Nottingham and University of Oxford [1], claimed that introducing a tax on unhealthy foods would save, at least, 3,000 lives a year from heart disease. The authors also claim this is a conservative estimate, because it ignores the benefits from the reduced incidence of diabetes, strokes and other obesity related illnesses.

Yet, despite the real benefits promised, many politicians and consumers were quick to dismiss the idea. Is it really a good idea to introduce a fat tax, or do Big Macs deserve to remain cheap and free of extra tax?

Arguments for a Tax on Unhealthy Foods

1. Externalities of Unhealthy Foods.

Unhealthy eating has an impact on ourselves but also on the rest of society. Obesity related diseases cost the UK £3.4bn per year. [2] The cost of Obesity in the US is estimated at $75 bn.[3] If we choose to eat foods that make us unhealthy and obese, this creates external costs such as:

1. Medical Costs – treating obesity.
2. Lost productivity at Work e.g. Time off sick
   
3. Premature death

Therefore, the government should collect sufficient tax from unhealthy foods to pay for the external costs that they create. It is the same principle as to why petrol and cigarettes are taxed; e.g. higher petrol tax is justified because petrol causes pollution.

The external cost of unhealthy food is not easy to calculate, but this is not a reason to avoid having a tax. The point is that at the moment society is effectively subsidising the consumption of unhealthy foods, and ultimately it is the taxpayer who has to pay for this.

2. Personal Cost of Obesity

Eating unhealthy foods increases the likelihood of obesity, early death, depression and a whole catalogue of related problems [4]. Higher prices would discourage people from consuming unhealthy foods. It may not stop people eating fatty foods completely, but this is not the aim. Reducing consumption of fatty and salty foods would have a significant benefit in improving health and personal well being.

3. It will save Lives

Currently, more than 216,000 people in the UK die from heart attacks and strokes each year [5]. Heart disease is the second most common cause of death. The report suggests that 3,000 lives per year could easily be saved in the UK. As well as saving lives, reducing obesity will also improve the quality of life.

Arguments against a Fat Tax

1. It is unfair to tax Fat people. It is discrimination.

This is not a tax on fat people. A government inspector is not going to go around with a weighing scale, dishing out tax penalties for people who tip over the scale. This is a tax on unhealthy foods, paid by everyone who chooses to consume them.

2. It's just another scheme to raise government revenue.

A tax on unhealthy foods should be revenue neutral. It is not about raising total tax revenue, it is about switching the tax burden. If the government raised £2 billion a year from such a tax, this tax could be used to subsidise healthy foods, pay for health care or reduce other types of tax.

3. It is a tax on the poor.

The argument is that those on low incomes are more likely to consume unhealthy foods, therefore, this tax will increase inequality. However, if a tax on fatty foods saves lives, we should not avoid implementing it just because it is the poor who will mostly benefit. If we are really concerned about the impact on equality, the revenue from a fat tax can be targeted to the benefit of the poor. An increase in inequality need not occur from a fat tax.

4. Nanny State.

• Who is the government to tell people what to eat? If people want to eat salty and fatty foods then let them.

But, the whole point is people are still free to consume as much salty and fatty foods as they like. It is just that now they have to pay a fairer reflection of the true cost to society. If you got drunk and caused economic damage, has not the state a right to make you pay for the economic costs of your drunkenness? Similarly society has a right to make you pay for the economic cost of unhealthy food. As an additional benefit, you will probably live longer and feel happier.

5. It won't have any Effect.

• Look at smoking; the government tax smoking, but people still smoke. Tax on petrol has not stopped people driving.

Demand maybe inelastic for fatty foods, but they will reduce consumption by a certain amount, and this is the intended effect. For example, a tax on an extra large Big Mac, may reduce consumption by 20%. Instead of eating 10 a week, some people may not only consume 8 a week. This reduction of 20% will have a big impact on improving health. The aim is not to stop people eating unhealthy foods, but reduce excessive consumption. In moderation fatty and salty foods do not cause a problem.


6. Obese people die early and save the government paying pensions.

In a perverse way, this is actually a good argument. Because people who eat unhealthy foods have a shorter life expectancy the government will pay out less state pensions. Therefore, this reduces the external cost of obesity and so lessens the justification for a tax based on externalities. However, in another way, the fact that people die early is hardly a powerful argument for not trying to stop it.



References:

[1] The study from the Queen's Medical Centre in Nottingham claims that taxing food containing lots of fat, salt and sugar would prevent more than 3,000 deaths a year from heart attacks and strokes. See Channel 4 report on Fat Tax

[2] Cost of obesity in the UK is £3.7 billion per year, according to a Government white paper on obesity. See report

[3] Cost of obesity in the US ($40 billion of this cost came from public taxes.)

[4] Link between Obesity and depression at Psychology Today

[5] British Heart Foundation

[6] BBC video on the Fat Tax


The author is this post particularly enjoys deep friend Mars Bars with extra salt.

Related Posts:

• Benefits of Electronic Road Pricing

• Why Gasoline Price should be High - Essay at Freakonomics Blog

Labels: taxation

EXPLAIN THE REMOVAL FACT OF AN INDIRECT TAX UPON THE MARKET FOR A PRODUCT.

• The supply curve will shift to the right. This will cause a lower price and higher quantity.
• The effect depends upon elasticity of demand. If demand is inelastic removing an indirect tax will cause a big fall in price.
• If demand is elastic it will cause a small fall in price and large increase in quantity.

Elasticity of demand

Labels: taxation

Regressive taxation includes taxes on alcohol, cigarettes and VAT.

Definition of regressive taxes - takes a higher % of income from those on low incomes.

Arguments for regressive taxes.

cigarette taxes help overcome market failure
indirect taxes don't affect work incentives like income tax - non distortionary and therefore are efficient

Arguments against regressive taxes.

Increases inequality. Poor have a reduction in discretionary income
Increasing income tax in Uk would have little impact on reducing work incentives.

• Taxes on negative externalities
• Should taxes on cigarettes be increased?
  

Labels: taxation

1. Finance Government Spending.

2. Reduce inequality. Higher income tax can help to reduce inequality. For example, the top rate of income tax (40% on incomes over £27,000) is a progressive tax. It takes a higher % of income from high earners.

3. Reduce consumption of De Merit Goods. These are goods like alcohol and tobacco. They have negative externalities.(costs to third parties e.g. passive smoking); they are also good where consumers underestimate benefits. Examples include cigarette tax and excise duty.


Essay Question: The government wishes to increase spending on the NHS and financing it by increasing taxes. Discuss the economic effects. (30) AQA


1. Effect on AD.

Higher government spending increases AD, however, the increase in tax will have the opposite impact of reducing consumer spending. Therefore overall the net impact on AD will be neutral.

However, it is possible that AD rises, if consumer confidence was high and increased taxes led to lower savings amongst consumers. This is unlikely thought.

2. Incentive Effects of Higher taxes.

An increase income tax could reduce work incentives. Higher tax makes work less attractive (substitution effect). However, there is also the income effect, which states that higher income tax reduces income and therefore, encourages people to work more. Overall, the impact is likely to be negligible; this is because income tax rates are low, and a modest increase will not reduce incentives.
The government may prefer to increase indirect taxes, such as; VAT and excise duties.

3. Effect on Inequality

If the government increased income tax on high earners, inequality is likely to fall. However, if they increased indirect taxes inequality is likely to rise; this is because taxes are regressive.

4. Crowding Out.

Increased spending and taxation, increases the size of public spending as a % of GDP. It is argued by some economists that government spending is more inefficient than private spending. For example, government spending is subject to admin costs, and a lack of financial incentives. Therefore in the long run, economic growth may fall due to the increased inefficiency.

However, it could be argued that government spending can actually increase productive capacity, by overcoming market failure. For example, better health care may lead to a healthier and more productive workforce. This argument would be stronger if it was for education and training.

• Tax in UK

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