Death & Taxes: Inheritance Tax
Just like death, paying taxes is one of life’s few certainties.
Combine the two and you come face to face with the inheritance tax, a levy applied to a person who inherits money or property or a tax on the estate of someone who’s recently passed away.
Many countries throughout the world, in some form or another, tax inheritances.
Germany, for instance, taxes values that surpass 500 thousand Euros at rates ranging anywhere between 7 and 50 percent depending on the relationship between the deceased and the inheritors.
However, other jurisdictions, for a multitude of reasons, have moved to abolish their inheritance or estate taxes.
Since 2004, Hong Kong, Portugal, Sweden, Russia, Slovakia, Hungary, Singapore, Austria and Norway, to name a few, have ended their experiments with this type of tax.
Hence, the question is: why does it work for some but not for others?
Here are your Taxlinked pros and cons of setting up an inheritance tax!
Advantages of the Inheritance Tax
Boosts Revenue: One of the perceived advantages of the inheritance tax is that it provides the government with an additional source of income.
The US, for instance, has one of the highest inheritance or estate taxes in the world and raked in close to $20 billion in these types of taxes for 2015, according to the 2015 report “Estate and Inheritance Taxes around the World” issued by The Tax Foundation.
In some cases, inheritance taxes can provide a reprieve from jacking up income taxes or pressuring the government into curtailing expenditures in public works and social services.
Exemptions Apply: Not all inheritances are taxed under most inheritance tax plans. Exemptions exist to protect people’s property and capital.
For example, per The Tax Foundation’s study, exemptions in OECD countries range from just over $105,000 (France) all the way to approximately $5,500,000 (USA).
It’s Progressive: Inheritance or estate taxes are progressive in nature.
The more people receive as an inheritance beyond the limits of the applicable exemptions, the greater the tax they will have to pay.
Hence, most of the tax’s burden falls on the shoulders of the very rich, and it allows the government to level the playing field by redistributing resources to those in need.
Disadvantages of the Inheritance Tax
Twice Taxed: One of the major criticisms of the inheritance tax is that it is a form of double taxation.
Fact is that the property and money being transferred from the deceased to the inheritor have already been taxed in one way or another.
Undermines Success: Many analysts believe the inheritance or estate tax penalizes success and creates a system in which one is not rewarded for one’s hard work, creativity and entrepreneurship.
According to Bob Rywick, Editor and Author with the Tax & Accounting business of Thomson Reuters, in a 2014 guest post for Forbes’ Taxgirl’s Blog, this sort of levy “is an attempt to redistribute wealth by taking from those who earned it and giving to those who did not.”
Quite Costly: Considering the exemptions applied and the costs required in administering this tax, many consider the inheritance tax to be a waste of time.
According to The Tax Foundation’s 2015 report, “the fiscal benefits of the tax to the government are eventually outweighed by the administrative, political, and economic costs of levying a tax on a narrow base, and repeal becomes a more and more viable option.”
In the case of the US, exemptions have been gradually increased leading to the steady decline of revenue accounted for by inheritance or estate taxes. Per The Tax Foundation’s analysis, US income from these kinds of taxes decreased by $18 billion between 2001 and 2015.
Additionally, there are several other costs involved in the levying of this tax. Rywick writes that “most taxpayers who may be subject to the tax incur substantial expenses in paying for estate planning advice to help minimize it,” while many others, particularly SMEs and businesses in the agricultural sector, are forced “to deplete working capital and even to sell business assets or farm land to pay it.”
What’s In Store for the Inheritance Tax?
Overall, the inheritance and estate tax is dying down throughout the globe. The Tax Foundation’s aforementioned report summarizes this trend best:
“The estate tax is losing ground around the world, not because moral conundrums have been resolved, but rather because it fails at the basic characteristics of being a tax. Its rate is high, causing a substantial drag on growth. Its base is narrow, making it a poor revenue raiser. And lastly, its base is poorly-defined, creating additional economic losses from tax planning.”