Wednesday, February 12, 2014
Luc Arrondel & Andre Masson recently published an article entitled, Taxing More (Large) Family Bequests: Why, When, Where?. Provided below is the abstract:
There is a capital taxation puzzle in most developed countries. Since the 1960s, revenues from wealth transfer taxation have been especially low and decreasing as a percentage of GDP, even to the extent of disappearing in quite a number of cases; by contrast, lifetime wealth or capital taxation generates much higher revenues and shows no decreasing trend. The full tax puzzle is certainly not easy to explain. Many usual explanations of the aversion to wealth transfer taxation also imply limited lifetime capital taxation: they cannot justify the very strong collective preference for lifetime capital taxation observed in most countries. On the other hand, capital market imperfections may explain higher levels of lifetime capital taxation, but not the diverging trends of the two components of capital taxation. We think that a key explanatory factor of the tax puzzle in general and of the growing unpopularity of wealth transfer taxation in particular stems from the rising role of family values and links: the family appears to be the only safe investment nowadays in the face of risky globalized markets and the feared retrenchment of the welfare state. Any realistic reform must take this social and political constraint into account. Most reformist economists think that lifetime wealth or capital taxation could act as quite an efficient substitute for too unpopular taxes on wealth transfers. We offer an alternative solution which recommends heavier and more progressive taxation on family inheritances (only) while allowing for various legal loopholes to avoid the tax. It could hence prompt parents driven by family altruism to increase (early) inter vivos transfers to their progeny and people driven by social altruism to make more charitable gifts and bequests, and would bring in additional and welcome revenues.
For an interesting review of this article, please read Are Inheritance Taxes Special? By Kerry Ryan.