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Tax inheritance more to reduce income tax?

Bertrand Garbinti
Lecturer at CREST/ENSAE (IP Paris)

Last May, inher­i­tance tax was put under the eco­nom­ic spot­light when the OECD pub­lished a report in favour of increas­ing the use of inher­i­tance tax­es to “strength­en equal­i­ty of oppor­tu­ni­ty and reduce wealth inequal­i­ty”1. To ensure greater social jus­tice, the report pro­posed that inher­i­tance should no longer be taxed at the lev­el of the giv­er. Instead, it should be paid based on the receiv­er. Before look­ing at pos­si­ble reforms, let’s look at this tax a lit­tle clos­er to under­stand its complexity.

Taxing inheritance is very unpopular

Sta­tis­tics show that 87% of French peo­ple con­sid­er that it is nec­es­sary to reduce inher­i­tance tax – almost 10% more than a few years ago2345. What is aston­ish­ing is not only that this reluc­tance accom­pa­nies the increase in the share of inher­it­ed wealth in our soci­eties but also that this tax is unpop­u­lar even among those who do not pay it. It is cer­tain­ly legit­i­mate to want to pass on all or part of one’s wealth and to fear not being able to do so. But, in the end, few peo­ple pass on large amounts and inequal­i­ties are high: the small­est 50% of trans­mis­sions rep­re­sent less than 5% of the total, while the largest 10% rep­re­sent as much as half – which is close to the inequal­i­ties in wealth. More­over, the cur­rent sys­tem means that most trans­fers are not even taxed, which rais­es ques­tions why so many peo­ple who will nev­er even have to pay this tax reject it. There are sev­er­al rea­sons for this sur­pris­ing unpopularity.

First, inher­i­tance tax is very com­plex. There are dif­fer­ent types of allowances that vary accord­ing to the rela­tion­ship (chil­dren are taxed less than grand­chil­dren, who are taxed less than broth­ers and sis­ters, etc.), a non-repay­ment peri­od, and a tax rate that varies accord­ing to the num­ber of chil­dren), a non-recall peri­od for dona­tions (those made more than 15 years before the death or before anoth­er dona­tion are no longer tak­en into account) as well as spe­cial regimes for busi­ness assets and life insur­ance (where, as an addi­tion­al com­plex­i­ty, tax­a­tion also depends on the age of the hold­er at the time the funds are paid out) and even for cer­tain finan­cial ‘gifts’. Like any com­plex sys­tem, it is poor­ly under­stood. Sur­vey after sur­vey, tax­pay­ers report a pro­found lack of knowl­edge about this tax: with a strong ten­den­cy to under­es­ti­mate deduc­tions and over­es­ti­mate the tax actu­al­ly paid.

It benefits a minority of well-informed people

In France, for exam­ple, each par­ent can give €100,000 net to each of their chil­dren every 15 years. For a cou­ple with two chil­dren, this rep­re­sents over €400,000, which is more than the gross wealth of 8 out of 10 French peo­ple, accord­ing to INSEE. This lack of knowl­edge is not unique to the French and sev­er­al recent stud­ies have high­light­ed the role it plays in rejec­tion of inher­i­tance tax else­where – show­ing that avail­abil­i­ty of infor­ma­tion clear­ly increas­es sup­port for this type of tax­a­tion. In Swe­den, for exam­ple, where peo­ple receive more infor­ma­tion about the share of inher­it­ed wealth in soci­ety are more like­ly to sup­port inher­i­tance tax6. This is also the case when peo­ple are remind­ed of the con­crete con­di­tions for being taxed and the share of peo­ple affect­ed by the tax, as has been shown in the US7. This infor­ma­tion is there­fore an impor­tant and nec­es­sary ele­ment in any debate on the issue.

It is also worth men­tion­ing the under­ly­ing feel­ing that this tax is unfair. A rea­son for this is that about half of the amount col­lect­ed is levied on so-called “indi­rect line“ trans­fers, i.e. trans­fers not between par­ents and chil­dren – even though these trans­fers only rep­re­sent about 10% of the amounts trans­mit­ted. This is because they are more high­ly taxed than the oth­ers. For exam­ple, the allowance for nieces and nephews is €7,967 com­pared to €100,000 for chil­dren. The tax rates are also much high­er, start­ing at 35% for sib­lings, 55% for nieces and nephews com­pared to 5% for chil­dren. This gives the impres­sion that peo­ple with­out chil­dren are less legit­i­mate in want­i­ng to pass on their wealth than oth­ers. In con­crete terms, if a per­son pass­es on €100,000 to his or her daugh­ter, there will be no tax to pay, where­as it will be over €50,000 if the same amount is passed on to a niece. In these cir­cum­stances, the tax rate, and the amount of tax paid depend more on the rela­tion­ship than on the amount passed on.

The OECD’s pro­pos­al to tax trans­fers not at the lev­el of the per­son pass­ing on but at the lev­el of the per­son receiv­ing is an inter­est­ing idea, already put for­ward by oth­er insti­tu­tions. These include France Stratégie and aca­d­e­mics such as Antho­ny Atkin­son8 or the Nobel Prize win­ner James Meade9. Last June, the com­mis­sion head­ed by econ­o­mists Olivi­er Blan­chard and Jean Tirole also rec­om­mend­ed the use of this tax, tak­ing hold of the idea10

What the economic literature says

Empir­i­cal stud­ies are few but sug­gest that inher­i­tance tax is less dis­tort­ing than oth­er types of tax­es and that the fear of a tax exo­dus of old­er peo­ple seems unfound­ed11121314151617. The ben­e­fits thus seem to out­weigh the poten­tial loss­es. This tax­a­tion even seems to have pos­i­tive effects on the labour sup­ply of heirs and to pre­vent busi­ness­es from being passed on too often to unskilled heirs1819. These con­sid­er­a­tions also make it pos­si­ble to change the way in which the debate could be positioned.

Rather than ques­tion­ing the appro­pri­ate­ness of increas­ing a tax in a coun­try where com­pul­so­ry deduc­tions rep­re­sent a sig­nif­i­cant part of the income of the vast major­i­ty of the pop­u­la­tion, we could ask our­selves how to design a more effi­cient and pro­gres­sive sys­tem. For exam­ple, would it not be appro­pri­ate to reduce the tax­a­tion of earned income by redesign­ing and mak­ing the trans­fer tax more pro­gres­sive? The tax base is clear­ly not the same and bet­ter access to tax data on dona­tions and suc­ces­sions would be need­ed to quan­ti­fy this issue in more detail. But high­light­ing this trade-off would make it pos­si­ble to debate more clear­ly a choice between, on the one hand, tax­ing work, an activ­i­ty that con­cerns the vast major­i­ty of cit­i­zens, and on the oth­er hand, tax­ing the high assets trans­mit­ted, which con­cern a much small­er pop­u­la­tion that is old­er and wealth­i­er overall.

1OCDE (2021), Inher­i­tance Tax­a­tion in OECD Coun­tries, OECD Tax Pol­i­cy Stud­ies, n° 28, Édi­tions OCDE, Paris
2Cf. la note de France Stratégie. Sur­veys and stud­ies have shown that the same is true of many oth­er coun­tries, too (UK, Italy, USA)
3Cf. par exem­ple Shake­speare, S. (2015). Vot­ers in all par­ties think inher­i­tance tax unfair. (YouGov Poll) (https://​yougov​.co​.uk/​t​o​p​i​c​s​/​p​o​l​i​t​i​c​s​/​a​r​t​i​c​l​e​s​-​r​e​p​o​r​t​s​/​2​0​1​5​/​0​3​/​1​9​/​i​n​h​e​r​i​t​a​n​c​e​t​a​x​m​o​s​t​-​u​nfair
4 Hen­rek­son, M. & Walden­ström, D. (2016). “Inher­i­tance Tax­a­tion in Swe­den, 1885–2004: The Role of Ide­ol­o­gy, Fam­i­ly Firms and Tax Avoid­ance”, Eco­nom­ic His­to­ry Review 69(4), 1228–1254.
5 Alesina, A., Stantche­va, S., and Teso E. (2018), « Inter­gen­er­a­tional Mobil­i­ty and Pref­er­ences for Redis­tri­b­u­tion. » Amer­i­can Eco­nom­ic Review, 108 (2): 521–54
6Bas­tani, S., & Walden­ström, D. (2021). Per­cep­tions of inher­it­ed wealth and the sup­port for inher­i­tance tax­a­tion. Eco­nom­i­ca, 88(350), 532–569
7Kuziemko, I., Nor­ton, M. I., Saez, E., & Stantche­va, S. (2015). How elas­tic are pref­er­ences for redis­tri­b­u­tion? Evi­dence from ran­dom­ized sur­vey exper­i­ments. Amer­i­can Eco­nom­ic Review, 105(4), 1478–1508
8Par exem­ple dans Atkin­son A. B., (2016), “Iné­gal­ités”, Paris, Le Seuil
9The Struc­ture and Reform of Direct Tax­a­tion, 1978, Report of a com­mit­tee chaired by Pro­fes­sor J.E. Mead­ow, Insti­tute For Fis­cal Stud­ies
10Les grands défis économiques, par la com­mis­sion inter­na­tionale Blan­chard-Tirole (https://​www​.strate​gie​.gouv​.fr/​p​u​b​l​i​c​a​t​i​o​n​s​/​g​r​a​n​d​s​-​d​e​f​i​s​-​e​c​o​n​o​m​i​q​u​e​s​-​c​o​m​m​i​s​s​i​o​n​-​i​n​t​e​r​n​a​t​i​o​n​a​l​e​-​b​l​a​n​c​h​a​r​d​-​t​irole)
11Cf par exem­ple Holtz-Eakin, D. & Marples D., (2001), “Dis­tor­tion Costs of Tax­ing Wealth Accu­mu­la­tion: Income Ver­sus Estate Tax­es, » WP 8261, NBER
12 Kopczuk W. & Slem­rod J. (2001), “The Impact of the Estate Tax on the Wealth Accu­mu­la­tion and Avoid­ance Behav­ior of Donors, » in William G. Gale, James R. Hines Jr., and Joel Slem­rod, eds., Rethink­ing Estate and Gift Tax­a­tion, Brook­ings Insti­tu­tion Press
13 Joul­fa­ian D., (2006) “Inher­i­tance and Sav­ing », WP 12569, NBER
14 Goupille-Lebret J. & Infante A. (2018), “Behav­ioral Respons­es to Inher­i­tance Tax: Evi­dence from Notch­es in France”, Jour­nal of Pub­lic Eco­nom­ics, 168: 21–34.
15Cf par exem­ple Bak­i­ja J. & Joel Slem­rod J. (2004), « Do the Rich Flee from High State Tax­es? Evi­dence from Fed­er­al Estate Tax Returns”, Work­ing Papers 10645, NBER
16Con­way, K. S. & Rork, J. C., (2006), « State « Death » Tax­es and Elder­ly Migration—the Chick­en or the Egg?, » Nation­al Tax Jour­nal, Nation­al Tax Association;National Tax Jour­nal, vol. 59(1), pages 97–128
17 Brül­hart M. & Par­chet R., (2014), “Alleged tax com­pe­ti­tion: The mys­te­ri­ous death of bequest tax­es in Switzer­land”, Jour­nal of Pub­lic Eco­nom­ics, 111, issue C, p. 63–78.
18Pour une syn­thèse voir par exem­ple le chapitre 5 de Kopczuk W. (2012), « Tax­a­tion of Inter­gen­er­a­tional Trans­fers and Wealth », WP 18584, NBER
19OCDE (2021), Inher­i­tance Tax­a­tion in OECD Coun­tries, OECD Tax Pol­i­cy Stud­ies, n° 28, Édi­tions OCDE, Paris.



Bertrand Garbinti

Lecturer at CREST/ENSAE (IP Paris)

Bertrand Garbinti is a research associate at the Institute for Public Policy, the World Inequality Lab and INED. His research focuses on the economics of inequality, public economics, taxation and family economics. His work has been published in the Journal of the European Economic Association, the Journal of Public Economics, the American Economic Association, Papers and Proceedings and the Journal of Population Economics.

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