The "death tax" is one of the most emotive and controversial levies, but what would its abolition mean for inequality?
ADVERTISEMENT"Nothing is certain except death and taxes," American statesman Benjamin Franklin told scientist Jean-Baptiste Le Roy back in 1789. While both dying and filling the state coffers are, to varying extents, pretty unavoidable, a "tax on death" is much less of a foregone conclusion.
Inheritance tax is considered to be the first modern tax to have spread widely. By the early 20th century, more than 60 countries had introduced it, generally to raise cash for wars or to weather lengthy recessions.
Inheritance tax considered "unjustified" by many
Towards the end of the century, the levy had fallen out of favour. As the counterculture spirit of the swinging sixties swept across the Western world, it brought down overzealous tax regimes in its wake. The US and the UK notably eased this fiscal burden. In the first decade of the new millennium, EU countries such as Austria and Slovakia went one step further, abolishing the tax outright.
Perhaps surprisingly, these moves to facilitate intergenerational wealth transfers have faced relatively little resistance. Among circles where "tax the rich" is an uncontroversial philosophy, the notion of sending bequests to the tax man is far more divisive. According to a UK poll by YouGov, 56% of Britons are in favour of scrapping a levy on inheritance. This is despite the fact that less than 4% of estates are actually affected. In France, a 2023 survey by Ipsos reported that 26% of respondents found inheritance tax unjustified. Across the border in Spain, 61% of respondents to a BBVA Foundation poll said bequests should be tax free.
Several experts explain these results by saying that individuals are egocentric. One possibility is that, although inheritance tax generally affects a small number of estates, people mistakenly expect to receive a legacy that will surpass tax-free thresholds.
"There is a difference between perception and reality in terms of who thinks they might have to pay tax, and who pays tax in the end," David Sturrock, Senior Research Economist at the Institute for Fiscal Studies, told Euronews Business.
"People aren't just entirely self-interested though," he hastened to add. Due to the emotive nature of the "death tax", the levy can raise objectives on moral grounds. Surely it's natural, some argue, to allow hard-working people to bestow their wealth on the people they love, particularly when they've already paid tax on their earnings in their lifetime? Even if we're talking about the rich, many believe we should shield intergenerational solidarity from the hand of the state.
Such a view can be challenged by reminding people that, lovingly motivated or not, bequests can entrench social inequalities.
"The call to abolish inheritance tax is simply about the protection of unjustified class privilege," said Stuart White, Associate Professor of Politics at Oxford University.
"Allowing the inheritance of wealth to be determined only by the accident of which family someone is born to … is consequently terrible for equality of opportunity and personal freedom," he added.
Value of bequests rises as value of assets increase
When looking at the correlation between parental wealth and the fortune of their descendents, the myth of meritocracy is dealt a fatal blow. Contradicting the idea that success is primarily built on hard work, figures show that the majority of financially comfortable individuals have profited from the generosity of older generations. This is becoming all the more significant now that, in many countries, bequests are becoming larger as a share of lifetime income. Largely driven by rising asset prices, such as the value of property, the rich are becoming richer. In other words, it is becoming increasingly difficult for more disadvantaged individuals to climb the wealth ladder through saving.
That said, as life expectancy rises, most inheritances are now being received later. If we want to talk about inequality, it's therefore more relevant to think about financial gifts, offered during a donor's lifetime. In these cases, recipients are likely to be younger, meaning that the support can be more transformative. Let's say, when you're in your twenties, you are given a lump sum of family money. Paying off your student loan, buying your first home, or investing in stocks instantly becomes more accessible. Without the added cost of rent, it is now easier for you to save more than your peers. Put into long term shares, your investments will grow. If you later decide to have children, it will also be easier for you to give them a helping hand. The result? A growing divide between the "haves" and the "have-nots".
In several countries, there are limits on how much tax-free money you can bestow during your lifetime. In Germany, parents can give their children or stepchildren a sum of up to €400,000 over a period of 10 years. In France, this allowance stands at €100,000 per child over a period of 15 years. In Ireland, this tax-free limit is €3,000 per year. To stop individuals offloading their wealth for tax purposes just before they die, many jurisdictions also have limits on when gifts can be made. For example, in the UK, if you pass away within seven years of bestowing money, it may be included in your estate for inheritance tax purposes.
The merit of the "death tax" also depends on the efficacy and the quirks of country-specific systems. In 1986, former President of the European Commission Roy Jenkins famously described inheritance tax as: "A voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue."
Put simply, Jenkins was suggesting that paying this fee to the state is a choice rather than an obligation, made by those who don't trust their family. Although most countries have altered their tax systems since 1986, loopholes are still there. This means that, when tax thresholds are low enough to impact the middle class, these levies can actually exacerbate inequality rather than alleviate it. Unlike the wealthiest individuals, who have the resources to navigate tax planning, the middle class may end up paying a larger portion of their assets to the state compared to the rich. It's also important to note that, because of the rising value of property, a growing number of traditionally less affluent families are starting to leave bequests affected by income tax.
So, shall we abolish inheritance levies in Europe? One conclusion, at least when we look at current rates, is that it doesn't really matter.
"A lot of major inequalities are not really driven by inheritances," said David Sturrock of the IFS. "They’re important, but they're still only one factor amongst many."
In most cases, wealth transfers that occur earlier in life do far more to skew the playing field than inheritances. What's more, children of rich parents can also benefit from more subtle advantages.
ADVERTISEMENTA rise in the rate of inheritance tax unlikely to find favour
Cultural capital, meaning social codes that facilitate success, are often passed down through generations. These benefits, although often linked to wealth through educational opportunities, are harder to correct using taxes.
If governments did want to strengthen the inheritance levy, one option would be to close loopholes and increase the number of estates being taxed. With fewer ways to "game the system", this could prevent tax avoidance and reduce generational wealth transfers. That said, it's currently hard to see why governments would bother.
Looking at the literature, hiking the "death tax" wouldn't sit well with the masses, meaning it would be politically easier to raise revenue in other ways. Far from being seen as a justifiable "Robin Hood" policy, raising inheritance tax can be morally sticky.
