Inheritance tax: values, emotions and interests

Inheritance tax: values, emotions and interests

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From time to time, the political debate about the inheritance tax is launched, which always finds an important social resonance, because it is a matter in which values, emotions and visions about the work of institutions come together, and the more or less the degree of confidence and satisfaction they raise. Four years ago, the debate intensified after the tax increase in the spring of 2014. 2020, in an unfortunate coincidence with the deaths that erupted in the first waves of the Corona virus. Now, the impetus for this was the proposal to cancel the tax announced by the Catalan government, in the context of the ongoing talks on the federal government's budget. Once again, the social debate on this topic intensified.

It's normal. This tax usually affects the transfer of property between members of the same family. More specifically, between grandparents and grandchildren aged 21 years or over (transmission between partners or for the benefit of children under 21 years of age is exempted in practice) and, with a greater burden, between less immediate relatives or persons outside the family. In this sense, The 2020 reform particularly aims to increase the impact on children aged 21 and over; So that if until that year tax collection in Catalonia was at the same level as the Central and Northern European countries that impose the tax, in subsequent years it was among the leading countries.

In practice, due to the presence of various exemptions and allowances, the effect of the tax is concentrated on a small percentage of the heirs. According to data for recent financial years, the vast majority of taxpayers have fees of zero or up to €1 (74% of taxpayers), and only 6% have fees of more than €10,000, according to data from the European Central Bank. State government collection 2022. It is true that some inheritance waivers do not collect this data; But also because the most common reason is that the inherited block is in debt. Liquidity problems for tax reasons, which in some cases lead to resignation, are linked to the municipal capital gains required in the event of property inheritance, which is a related matter to which I will return later; Let us now clarify that it is not an inheritance tax.

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Clearly, greater or less impact is no bar to considering a more or less equitable tax. Ultimately, the concept of contributory “fairness” is subjective. One of the most important arguments in this discussion is what it means to tax goods that have already been taxed, which is why double taxation arises. The one who causes the inheritance (the deceased) is not obliged to pay inheritance tax (at least since the abolition of the deceased's capital gain, which requires taxing inheritance gains arising from the deceased, and making the heirs liable), but the heir, who is a different natural person. Therefore, there is a transfer of property between two people, unless the deceased and the heir are considered to be the same “person” (and therefore there will be no transfer). This consideration is limited to cultures such as China, where children are considered a physical extension of their parents, and thus there is no inheritance tax (although there is a property transfer tax).

In less social and more liberal societies, different people are considered parents and children, and advantages and disadvantages are not considered transferable. For this reason there is a transfer of ownership (actually a transfer due to death), and whoever pays inheritance tax is subject to tax for the transfer. Therefore, it is an interesting discussion why other transfers, such as the purchase of an apartment, should be taxed (more so than an inheritance), but not a non-purchase receipt. I also find it interesting to point out that if it is accepted that a child has an unconditional (tax-free) right to his parents' property because they “already were his”, why the unconditional obligation to take care of the debt? Let's be precise; We already know that debts must be paid from inheritance. However, if debts exceed assets, the heir can waive the inheritance, because the debts “were not his” (hence the majority of waivers, as previously mentioned). The asymmetry between the claim of an unconditional right and a literal duty seems clear to me.

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Advocates of the existence of the tax – and I am one of them – tend to support the idea that imposing taxes on the heir does not mean double taxation, for the reasons mentioned above. The inheritance tax can help alleviate the concentration of wealth, which translates into the concentration of power, which contributes to the creation and consolidation of economic dynasties, which weakens liberal societies. In terms of double taxation and assessment of individual merit, in my view the tax on general wealth seems more controversial, which effectively doubles the taxes imposed on the same person (for income derived from work or wealth and ownership thereof). Perhaps this is why some regions of Spain are the only places in the EU with a general wealth tax. It is interesting that the social debate here revolves around succession and not heritage.

To prepare a list of specific problems related to tax composition would require a very long article, so I will limit myself to pointing out a few of them and discussing them briefly.

The practical exemption from family business ownership makes productive sense, while at the same time introducing a clear disparity between different types of wealth and, moreover, serving as a conduit through which high net worth individuals can articulate mechanisms that allow them to largely evade taxes. (And also property tax). This was precisely the reason that led to the suppression of inheritance in Sweden, or the declaration of the estate tax unconstitutional in Germany.

It is true that the possibility of leaving an inheritance to children is an incentive to save, and this is beneficial for the economy. It is something that must be taken into account by any functional design of an inheritance tax, and is a limitation either through the breadth of the personal scope of the tax (the people affected by it) or its amounts. However, the problem of changing residence seems less important to me, because death (and hence tribute) is a one-time event and generally uncertain in time. I think the wealth tax is more problematic in this sense, because it is a regular (annual) tax that holds true over time. Again, the discussion may not be completely focused.

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In the context of the previous paragraph, I have the impression that the recent reform of 2020, highlighted beyond reason – at least, compared to abroad – the burden on children aged 21 and over. Likewise, taxes on the inheritance of third parties, without family connections, can become practically expropriatory (and for communities like the Community of Madrid, they generate an impressive pool of inheritances and donations – 80% of those in Catalonia – although I've heard they do ). You don't have the tax).

Finally, on this list, it is important to consider municipal capital gains. Unlike inheritances, they are generally absent from allowances, and tax values ​​set by councils are often above market, but only wealthy obligors with large estates are able to afford viable appeal procedures. The combination of these factors is what causes the liquidity problems to pay the levy (this levy), which would have a clear and easy abode: that the city council's assessment was at the same time a firm offer to buy, since it seems fair to me that if the government could set the price, it should She should also put the wallet on it.

As you noticed, I did not talk about the inheritance tax and the fiscal deficit in Catalonia. First, because it does not affect the meager state funding at all. Secondly, because it would be possible to respect every one of the ceded and special taxes; There are more serious cases that affect a larger number, such as the tax difference on the transfer of ownership.

To conclude: The values ​​and emotions underpinning the debate over inheritance tax are intense and highly conflicting. However, it seems to me that there are many practical reasons to address the problems involved in tax design, some of which are summarized above, because the first people interested in preserving the social legitimacy of the tax are its proponents.

Brother BillProfessor of Economics at the University of Barcelona.

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