Tax inheritance more to reduce income tax?
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.