2.5 Conclusion of Chapter 2

In this chapter, I provided an overview of death taxes and taxes on gifts. Such an overview is in line with the first purpose of the study, i.e. the description and systemisation of death and gift tax laws as such. More specifically, the overview includes the key features of the death taxes and taxes on gifts. In that regard, I have distinguished between inheritance and estate taxes, the other types of death taxes and taxes on gifts. More specifically, I observed that states imposing a transfer tax upon death levy either an inheritance or an estate tax. The inheritance tax is an acquisition-based transfer tax applicable to the share of the inherited property received by each beneficiary. Furthermore, its taxable event is the enrichment of the beneficiary upon the deceased’s death. On the other hand, the taxable event of the estate tax is the mere mortis causa transfer of the deceased’s estate to the beneficiaries. It is important to note that the gradual introduction of elements looking at beneficiaries have altered the nature of the otherwise “impersonal” estate tax, which, in the past, focused only on the mere transfer of property from the deceased to beneficiaries. Finally, I noted that states levy two main taxes on gifts: gift taxes and inter vivos income or capital gains taxes on gifts. Gift taxes are acquisition-based property transfer taxes while inter vivos income taxes on gifts often follow the income tax rules.

Furthermore, I discussed the establishment of tax jurisdiction in the case of inheritance and estate taxes, the other types of death taxes and taxes on gifts. More specifically, I observed that states establish inheritance or estate tax jurisdiction based on either a personal or an objective nexus of a person with their territory. As a rule of thumb, states levying inheritance or estate taxes rely on the deceased’s or the beneficiary’s personal nexus with their territory, which, if satisfied, makes the share attributable to the beneficiary (in the case of an inheritance tax) or to the entire estate (in the case of an estate tax) taxable on a worldwide basis. In the absence of such personal nexus, states may still levy inheritance and estate taxes based on an objective nexus of the deceased or the beneficiary with the state concerned. The objective nexus justifies the levying of inheritance and estate taxes solely on domestic assets (the so-called “situs principle”). Concerning the other types of death taxes, I observed that states levying mortis causa income or capital gains taxes often determine their taxing rights based on the income tax rules under which the residence/domicile of the income recipient is decisive. The same is true in the case of inter vivos income or capital gains taxes on gifts. On the other side, gift taxes are levied under a personal and objective nexus that is often determined under the same concepts used as for death tax purposes.

In addition, I noted that the death tax revenue rates in most OECD member countries are declining. Arguably, the gradual personalisation of estate taxes and the “birth” of the already personal inheritance tax resulted in the decreasing revenue-raising capacity trends of death taxes. Nevertheless, the justifications for death taxes seem to be more important than their revenue-raising capacity. In that regard, I provided an overview of the justifications of death taxation. However, not all justifications can be considered primary justifications of death taxation. Furthermore, there is a degree of overlap between certain justifications.

In my opinion, there are four categories of justifications of death taxation. The first category refers to justifications that are explained from the perspective of the beneficiary. This category includes most of the invoked justifications, i.e. the ability-to-pay-taxes justification, the tax equality justification, the diffusion-of-wealth justification, the work stimulating justification, the wages-for-work justification and the justification of less pain. The second category includes justifications that are explained from the perspective of the deceased, i.e. the penalty for the deceased’s tax evasion justification, the belated fee justification and the substitution for not imposed income taxes justification. The third category includes justifications that are explained from the perspectives of both the deceased and the beneficiary, i.e. the windfall justification and the profit justification. The fourth category includes justifications explained from the public good perspective, namely the financing of the probate costs and a means for the abolition of useless intestate inheritance justification. It is worthy of note that some of those justifications apply by analogy to taxes on gifts that are usually considered complementary to death taxes.

In my view, the windfall justification seems to be the most convincing, complete and unique justification of death taxation (and, by analogy, gift taxation) as it explains why states consider it fair to tax incidental and unexpected receipts of wealth (“why to tax”) and at the same time, to protect the family property when received by family members (“how to tax”). Therefore, this justification can explain progressivity both based on the size of the mortis causa transferred property (taxation of accidental transfers of property) and the degree of kinship between the parties involved (protection of family property). However, I note that the OECD IHTMTC seems to recognise both the windfall justification and the ability-to-pay-taxes justification as primary justifications of death taxation, as discussed in chapter 4.