2.4.4 The diffusion-of-wealth justification

The diffusion-of-wealth justification serves as the fourth justification of death taxation. This justification does not apply only to death taxes but to any tax. Death taxation addresses the accumulation of wealth in large families and safeguards the distribution of this wealth to all the members of the society. According to the OECD, “[t]here is a clear case on distributional grounds for taxing wealth transfers at death. Although there is limited evidence on the relative importance of inherited wealth in total wealth and in the persistence of wealth inequality, there is a strong case for taxing wealth transfers to reduce intergenerational inequality and increase equality of opportunity by reducing and dispersing wealth holding at death.”1

West considered the diffusion-of-wealth justification a socialistic justification and stated that it might be better for the children of the deceased in every way to be left with only a moderate amount of property. The inheritance of a large fortune may prove an encouragement to idleness rather than an incentive to industry and may be harmful to both the heir and the society. It might have been some such considerations that led to Montesquieu’s remark: “La loi naturelle ordonne aux pères de nourrir leurs enfants; mais elle n’oblige pas de les faire héritiers.”2

I note that the diffusion-of-wealth justification is closely related to the tax equality justification. Neither justification, however, explains the progressivity of the tax rates based on the kinship of the parties involved. Furthermore, it has been argued that death taxes do not make a significant contribution to the objective of breaking up wealth concentration.3 For these reasons, I do not consider this justification a primary justification of death taxation, such as the tax equality justification.