Taxes and violins

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In its reporting (paywall) on the publication of the annual ‘Rich List’, the Sunday Times told us that some ‘business leaders’ are unhappy with the Chancellor’s proposals to impose tax on the transfer of shares in ‘family businesses’ to the next generation. Apparently, some family businesses don’t have the cash available to pay such a tax, which means that the individuals might need to sell some or all of the business to someone else in order to pay it. It would be cruel, but wholly true, to point out that exactly the same is true of anyone inheriting anything from a large estate: if the estate does not include enough cash to pay the tax, then assets would need to be sold. Whether the shares are in a ‘family firm’ or merely shares in a random company doesn’t look to be an entirely relevant distinction: the fact is that assets are being inherited and that tax falls due on an estate.

Those impacted are arguing that ‘family firms’ provide a lot of employment and contribute to the UK’s economy. It’s true, of course, but it fails to explain why that would not continue to be true if the company were no longer to be owned and run by the same family, and that the damage would be such that giving family members an effective subsidy to continue their ownership delivers more benefit to the economy. No-one has yet identified a genetic basis on which the descendants of the founder are somehow better equipped to run a company than anyone else. Experience shows that whilst such a company often continues working as well (or as poorly) under the next generation, sometimes a member of the next generation proves him or herself to be highly successful and turns a sleepy company into a giant, and sometimes those of the next generation taking over prove to be utterly inadequate at the job and end up destroying the company. None of those outcomes is pre-determined by breeding or genetics; inheritance does not presuppose merit. In short, there is nothing about inheriting a family company which distinguishes its future prospects from those of a company which is bought by an outsider.

What inheritance does do, however, is ensure that wealth created by one generation passes to the next generation and is kept within the family. Meritocracy it ain’t; and tax concessions are a direct subsidy which enables families to hold on to wealth amassed by their ancestors, regardless of any talent or ability that they themselves might possess. There are those who argue against the whole principle of an inheritance tax. There is a coherent argument to be made for such a proposition, although it’s not one with which I would agree. But there is no rational economic basis for distinguishing between wealth held in a company which some ancestor founded and wealth invested in a publicly quoted company. The sympathetic violins for the poor hard-done by descendants can be safely stood down.