2.4 Justifications of death taxation

If, according to Eisenstein, the answer to the question “Why do states levy inheritance taxes?” has little to do with revenue, one may wonder why states continue levying these taxes in the 21^st century. In my view, the justifications of death taxation provide the answer to this question.

It is true that the fact that death taxes have been in decline for the last 20 years comes as no surprise to the opponents of death taxation due to the inability of the traditional tax justifications to provide a convincing response as to why states should levy these taxes. It is worthy of note that some states do not levy death taxes and some other states have already abolished their death taxes.1 Nevertheless, I question why only the traditional tax justifications need to be taken into account for the justification of death taxes, the nature and objectives of which differ from those of other types of taxes levied in a state.

Apart from the insufficient traditional justifications, the death taxation opponents put forward a fairness argument against death taxation. In their view, it is unfair that the deceased has to pay income tax during his lifetime and that his property is subject to death tax at the time of his death. To be blunt, the opponents of death taxation believe that it is unfair that an “uninvited” beneficiary, i.e. the fiscus (state treasury), inherits part of the deceased’s savings upon his death. One could argue that this approach is flawed because two different persons pay two distinct and non-comparable taxes on two distinct taxable objects: the deceased was periodically paying income tax during his lifetime on his received income while his beneficiaries pay the inheritance tax upon the mortis causa receipt or transfer of a property. Thus, any allegation of juridical double taxation2 may not be valid from a legal point of view.3^, 4 In that regard, I note that the OECD mentions that “[i]n the case where wealth transfer tax is levied on the recipient rather than on the donor (i.e. an inheritance tax rather than an estate tax), there is no double taxation of the donor himself and the inherited wealth is also only taxed once in the hands of the recipient”.5^, 6 Nevertheless, I would expect that an economist may not share this view, focusing on the effect of the accumulation of taxes.7^, 8

In parallel with the low contribution of death and gift taxes to the revenue inflow, the opponents of death taxation use the negative public opinion about death taxes as an argument against them in combination with the fact that not all states levy these taxes. Public opinion towards death taxes is indeed negative,9 as people consider them unfair. For example, in 2015, a new YouGov poll asked the United Kingdom (UK) public how fair or unfair it considered several types of taxes, including inheritance tax, VAT, and the BBC licence fee. Of the voters, 59% considered inheritance tax to be unfair – the highest figure for all the taxes polled.10 Some years ago, in 2009, the Netherlands company, TNS NIPO, conducted a similar survey and inheritance taxes emerged as the most unfair in the Netherlands with gift taxes being the sixth most hated tax.11 Interestingly, these surveys compared the inheritance tax to other taxes, e.g. VAT/GTT, income tax, and car or fuel taxes.

In that regard, I partly attribute the negative public opinion on death taxes to their nature and design. The example of the imposition of the inheritance tax is illustrative. As previously mentioned, the tax is paid by the beneficiaries, but its taxable base is determined either based on the deceased’s or/and beneficiaries’ personal nexus, or an objective nexus. This may often create uncertainty as to the person liable to pay the tax due. Moreover, the inheritance tax rates are determined based on the size of the inherited property and sometimes the kinship between the deceased and the beneficiary. This may increase, in my view, the degree of uncertainty as to the person who is liable to pay the tax due, especially for people who are not familiar with death taxation.

On the other hand, income taxes seem to be less complicated. More specifically, a salaried employee expects that he will be taxed on a fixed tax base – his earned income – and at a certain rate, which is determined based on the size of this income. Most importantly, the employee expects that his residence will determine whether his worldwide income will be subject to tax (“resident taxpayer”) or only the income sourced in the territory of the state (“non-resident taxpayer”).

Complexity, however, should not run against fairness.12 In my view, the justifications of death taxation provide a convincing answer to Eisenstein’s question mentioned above. I present a total of fourteen justifications of death taxation as discussed in the academic literature or the work of the OECD or invoked by the states when introducing a death tax (in particular, an inheritance tax and an estate tax). It follows that the death tax laws of a state may refer to only one or two justifications of the overview here below or adopt a differentiated weighting of these 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 justifications of this overview, 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 perspective of both the deceased and the beneficiary, i.e. the windfall justification and the profit justification.

Finally, 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 these justifications apply by analogy to taxes on gifts that are usually considered complementary to death taxes.13