Rajiv Prabhakar, Karen Rowlingson and Stuart White put the case for adopting a progressive approach to unearned windfalls

THE global credit crunch, a downturn in the housing market and disputes over public sector pay do not spell happy economic times. And, given the recent controversy surrounding the Government over the abolition of the 10 pence rate for income tax, some people might wonder if there is any point raising the question of reforming inheritance tax right now.

However, it is precisely at such times that policies can be particularly vulnerable. Failure to argue for inheritance tax risks the case for it being lost.

The Conservative Party’s fortunes have recently revived. Much of this appears due to Shadow Chancellor George Osborne’s promise to raise the inheritance tax threshold to £1 million. Osborne sounded the “death knell for the death tax” during his conference speech late last year. This provoked a warm response from much of the media and helped deter Labour from calling a general election. Chancellor Alistair Darling was pushed into announcing changes to inheritance tax that related to the transfer of allowances between married couples and civil partners. The descendants of these couples now benefit from a larger combined allowance than their forebears. These political developments built upon a broader campaign against inheritance tax. Newspapers such as the Daily Express have led attacks against this tax.

It is against this background that we have written a report for the Fabian Society entitled How to Defend Inheritance Tax. We seek to add to efforts to rebalance the debate. Those supporting inheritance tax often do not get a fair hearing.

So, why have inheritance tax at all? Fundamentally, the argument is about whether we want to create a society based on equal life chances for everyone. Wealth is important for allowing people to have genuine opportunities. However, wealth is very unequally spread throughout our society. A Fabian Society Commission on Life Chances and Child Poverty records that the proportion of wealth held by the wealthiest 1 per cent of the population rose from 17 per cent in 1991 to 24 per cent in 2004.

Sometimes wealth inequality can be justified. Inequality might provide incentives for economic growth. But it is hard to justify present levels of inequality. Allowing people to transfer wealth unchecked means that the advantages of wealth cascade down the generations. A minority are privileged simply from the random and lucky circumstance of being born to rich parents. Of course, creating a free and equal society does not depend on inheritance tax alone. For example, there are strong arguments for spending on the education of the very young. But such policies are not alternatives to inheritance tax. Rather, they can work together to enhance freedom and reduce inequality.

It might be tempting for some to conclude it is not worth making the case for inheritance tax. The worry here is that inheritance tax provokes strong emotions and so one should concede defeat on this issue.

However, it is really important to see inheritance tax as part of the challenges facing all taxation. There are concerns about a range of taxes, not just inheritance tax. The Labour Government faced a serious crisis in its first term in office from protests over fuel duties. There is current controversy over income tax.

In their book Death by a Thousand Cuts, Michael Graetz and Ian Shapiro point out that the attacks on estates tax in the United States, which has now been abolished, formed part of a wider assault on taxes. Failing to make the case for inheritance tax creates problems for other taxes. Indeed, part of the difficulties the Government found itself in over the 10p income tax rate can be traced to its failures to make a proper case for reform.

In making the case for inheritance tax, it is important to counter popular myths and misconceptions. There is widespread ignorance of how inheritance tax works. The idea that inheritance tax is double taxation is wrong. Only the living pay taxes, not the dead. Thus, the person who accumulates the estate and pays income tax does not pay inheritance tax when they are dead. Similarly, there is a concern that rising house prices mean more people are paying the tax. However, house price rises often happen through no intervention by the householder, but through the collective investments in an area by public authorities. Why should such windfall gains go untaxed?

Although it is important to correct these misconceptions, on their own they are not enough to win support for inheritance tax. Information does not constitute a positive argument for it. So far, the right has developed the more resonant language on the issue – the “death tax” label, for instance. However, supporters of inheritance tax can surely develop their own political response.

One reason why inheritance tax provokes strong emotions is that it seems to violate a natural desire of parents to work hard for their children. Of course, there is nothing wrong for parents wanting the best for their offspring. But why does this commitment undermine an inheritance tax? The truth is that the efforts of many parents will be in vain because they lack the resources to help their children. This is not an argument about the poor. Many ordinary, hard-working parents will flounder against the rocks of entrenched wealth inequalities. Moreover, the bequest motive raises problems for the right. Those Conservatives who rail against a culture of handouts and “something for nothing” culture cannot endorse untaxed transfers of wealth.

What, then, is to be done? We do not pretend to offer complete answers. However, we should start by having a constructive debate. One idea worth re-visiting is the idea of a capital receipts tax. This would allow people to have some gifts or inheritances untaxed, but then tax this after a certain threshold. This would focus the tax on the recipient of a gift or inheritance. This is fair, given that they have not worked for this themselves.

This is not a new idea. It was advocated in the 1970s by commentators such as Anthony Atkinson and Cedric Sandford. More recently, it won support from a Fabian Society commission on taxation and citizenship.

Many issues remain to be specified. What is the appropriate threshold for such a tax? How can policy overcome the complexities of administering this tax? Supporters of the tax must not allow themselves the luxury of sitting back. This will simply allow critics to shape the debate.

Rajiv Prabhakar, Karen Rowlingson and Stuart White are authors of the Fabian pamphlet How to Defend Inheritance Tax. Further details can be found at www.fabians.org.uk