Harry Geels: The objections to a high inheritance tax
This column was originally written in Dutch. This is an English translation.
By Harry Geels
Recently, the discussion about increasing inheritance tax has flared up again. This is supposedly necessary to combat inequality. But inheritance tax is nothing more than a 'band-aid solution'. There are other solutions.
The discussion about inheritance tax was put back on the agenda this summer by various columnists, for example by Peter de Waard ('Can the death tax be raised to 85%?') and Sander Schimmelpenninck ('The shameless lobby [against the inheritance tax] of the dishonorable and short-sighted rich deserves strong resistance'), which again received support, especially through letters submitted, such as this one in the NRC ('No, inheritance tax is not double taxation). However, there are various practical and ethical objections to a high or 100% inheritance tax.
Practical objections
The first practical problem arises if the assets to be inherited are largely illiquid, for example in the form of a (family) business, real estate and/or art. The heirs will most likely not be able to pay the intended high inheritance tax immediately, unless they sell the assets. In the event of a necessary business sale, the survival of the company may be at risk. In the Netherlands, under the current rules, transfer arrangements are possible with the tax authorities, although these are not transparent.
A second objection is closely related to a possibly necessary sale of illiquid assets. If sales 'must' be made, this can lead to price distortions on the one hand, and to lower prices than the market price on the other, because buyers know that sales have to take place.
Thirdly, the inheritance tax is an inefficient tax anyway. The revenue in the Netherlands is just over two billion and many people who are affected annually (only a few percent of the population) find the tax unfair and avoid it. In addition, work must be done to properly keep track of all assets, for example by the tax authorities. With a few tenths extra in VAT, a large increase in inheritance tax is not necessary. VAT is an efficient tax. It can be collected efficiently, is more difficult to avoid and can steer consumption behavior (and in passing, the large consumer pays more than the small consumer).
Fourthly, with high(er) inheritance taxes, people will be even more likely to spend most of their wealth before death. If this does not involve philanthropy (see below), this will usually lead to unnecessary, and perhaps undesirable, consumption in the context of the climate problem. Nobel Prize winner Milton Friedman explains this here in 4 minutes. In economic terms: the 'Marginal Propensity to Consume (MPC)', which is lower for rich people than for poor people, increases for the rich due to higher inheritance taxes.
Ethical concerns
The first ethical objection is that taxes are economically (though not legally) a form of expropriation. Of course they are necessary to 'run' a society, but fundamentally we must be reluctant to raise taxes. And if we raise them, there must be a clear purpose, for example for education. Secondly, someone should be able to determine for themselves what happens to their assets after death, also known as 'the right to private legacy'. When you pay taxes, the government decides what happens to the money.
Third, family wealth can contribute positively to intergenerational support and strengthen family ties (I admit, there are also arguments about inheritance). Our society, although it has strong individualistic features, is built on families. In addition, research shows that parents are willing to limit their own consumption to promote the well-being and success of their children. Friedman's thinker: 'The only way by which you can effectively redistribute wealth, is by destroying the incentives to have wealth.'
Symptom control
But the biggest argument is that inheritance tax – as an argument to promote equality – is treating the symptoms. In my previous column I mentioned three reasons why there has been an increase in inequality in recent years, especially in the US: central bank policies, globalization and the change in the economy that makes it 'winner takes all' principle is becoming increasingly important. Equal opportunities in good education also appear to have decreased. Let's shift the focus to possible solutions.
Solutions to inequality
Changes in the system, such as different monetary policies or equal education for all, can unfortunately take a lot of time. In addition to this, there are other options specifically for inheritance tax, for example fiscal promotion of donations from a social point of view, both by the testators and by the heirs. The self-determination argument is paramount. The list of museums that have been created in recent decades thanks to donations, for example, is long. With tax-favorable donation rules, this can be even longer. It helps further if philanthropy is seen (and taught) as a virtue and a form of self-realization.
We should also provide fiscal facilitation for heirs to be able to set up investment funds with an inheritance, for example with social goals. In this way, the heirs can make a valuable contribution to society (without government interference) and at the same time pay tribute to the deceased. And not unimportant: this creates more even spending, or perhaps even maintenance of the legacy.
In general it is also about freedom. In the words of Milton Friedman: 'A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.'
This article contains a personal opinion from Harry Geels
