Taxation of cross-border inheritances and donations (FM nr. 165) 2021/2.3:2.3 History of death taxes and revenue trends

Taxation of cross-border inheritances and donations (FM nr. 165) 2021/2.3

2.3 History of death taxes and revenue trends

Documentgegevens:

Dr. V. Dafnomilis Adv. LL.M., datum 01-02-2021

Datum: 01-02-2021
Auteur: Dr. V. Dafnomilis Adv. LL.M.
JCDI: JCDI:ADS263336:1
Vakgebied(en): Internationaal belastingrecht / Voorkoming van dubbele belasting
Schenk- en erfbelasting / Algemeen

Death taxation is one of the oldest forms of taxation, with roots that are believed to date back to ancient Egypt1 and Greece. Researchers have traced land transfer taxes to the reign of Psametichus I (654-616 BC) in ancient Egypt. Land transferred by inheritance carried a ten per cent tax.2 Close families members were not exempted.3 Scholars assume that the Greeks borrowed the inheritance tax from the Egyptians. The tax apparently raised substantial revenue while simultaneously producing complaints, evasion, and fraud.4

In ancient Rome, Emperor Augustus (r.27 BC-14 AD) established an inheritance tax in Rome in 6 AD to fund military pensions.5 By threatening the Roman people with the reimposition of a prior and reportedly much-hated direct land tax, Augustus won the passage of the inheritance tax in its place. The tax, known as vicesima hereditatium, applied only to Roman citizens. Unlike the Egyptians, who taxed the property transferred, the Romans taxed the property received.6 Certain close relatives and later all close relatives were exempt from the tax.7 However, Hauser notes – quoting West – that Emperor Caracalla (r.212 – 217 AD) increased this fruitful revenue source by doubling the tax rate, abolishing exemptions for close relatives, and, in 212 AD, extending Roman citizenship, and with it liability to the inheritance tax, to all the free inhabitants of the whole Empire. The citizens did not welcome this change and the tax collector’s position soon became a miserable one.8

The basis, however, of the current death taxes was established in the feudal states during the Middle Ages when the ownership of immovable property indicated economic and political power. Thus, such economic and political power could generate revenue for the feudal states, e.g. through the imposition of “the relief”.9^,10 Of note is that in the Middle Ages wartime revenue considerations prompted states to introduce a death levy.11 In some states, the church collected a death payment too (the so-called “mortuary”12). According to van Vijfeijken (2006), the death tax of the past was based on the easily perceptible event of the death and was levied on the deceased’s (presumably large) estate, with the states usually disregarding the beneficiaries’ personal circumstances.13 In this way, the death tax of the past (which, in essence, was an estate tax) could generate more tax revenue.14

Nevertheless, in the 20^th century, people invented more complex systems of attribution of property and, thus, the ownership of immovable property did not always result in economic and political power. Furthermore, the consideration of the beneficiaries’ circumstances – as shown by the application of tax rates determined by the degree of kinship between the deceased and his beneficiaries – led to the “birth” of inheritance tax and the gradual “personalisation” of estate taxes. The same is true due to the increased exemption thresholds and the granting or broadening of the subjective tax exemptions to close relatives and spouses, even in states levying “impersonal” estate taxes. Arguably, the gradual personalisation of death taxes resulted in their decreasing revenue-raising capacity.15^,16

In relation to revenue trends of death taxes, the inheritance revenue rates in most OECD member countries are declining (according to the OECD Revenue Statistics). The revenue from death taxes represents less than 1% of the total revenue of the states,17 and one can question whether states (should) attach significant importance to death taxes in general.18 Nevertheless, I observe that the justifications of death taxes seem to be more important than their revenue-raising capacity.19 According to Eisenstein, “[t]he permissible size of inherited wealth is an issue to be resolved on its own in the light of social policy. While one answer may collaterally yield more revenue than another, the wisdom of the answer has little to do with revenue.”20

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Voetnoten

Voetnoten

Wolfe D. Goodman, “General Report: International Double Taxation of Inheritances and Gifts,” in Cahiers de Droit Fiscal International 70b (London: IBFD, 1985), 17.

Barbara R. Hauser, “Death Duties and Immortality: Why Civilization Needs Inheritances,” Real Property, Probate and Trust Journal 34, no. 2 (1999): 366; Max West, Inheritance Tax (New York: Columbia College Studies, 1893), 181-183.

William J. Shultz, The taxation of inheritance (New York: Houghton Mifflin Company, 1926), 3.

William J. Shultz, The taxation of inheritance (New York: Houghton Mifflin Company, 1926), 4.

See also Kenneth Scheve and David Stasavage, Taxing the rich (New Jersey: Princeton University Press and Russel Sage Foundation, 2016), 93.

Barbara R. Hauser, “Death Duties and Immortality: Why Civilization Needs Inheritances,” Real Property, Probate and Trust Journal 34, no. 2 (1999): 367.

“The relief” rested on the theory that the lord owned the land while the tenants occupied and farmed the land. When a tenant died, the tenant’s heir could only obtain possession of the land by paying the relief tax to the lord. At first, the lords demanded arbitrary amounts, but later, the lords often fixed the amounts.

10.

See also Max West, Inheritance Tax (New York: Columbia College Studies, 1893), 185-189.

11.

For instance, in the Middle Ages, the “heriot tax” was one of the tenant’s military support obligations. Tenants paid the tax on farm stock “loaned” to them based on the idea that the lords owned the chattels. See Barbara R. Hauser, “Death Duties and Immortality: Why Civilization Needs Inheritances,” Real Property, Probate and Trust Journal 34, no. 2 (1999): 369. Furthermore, in latter centuries, wealth taxes had been imposed explicitly for raising revenues (e.g. in the UK in 1984, in order to finance an impeding or an actual war, e.g. the First World War; – i) in the USA from 1797 to 1903 and in 1916; and ii) in Canada in 1941). See more, David G. Duff, “Taxing inherited wealth: A philosophical argument,” Canadian Journal of Law and Jurisprudence 1, no. 6 (1993): 7.

12.

The church intended these death payments to compensate for tithes or other duties that laymen had missed during their lifetime. See Barbara R. Hauser, “Death Duties and Immortality: Why Civilization Needs Inheritances,” Real Property, Probate and Trust Journal 34, no. 2 (1999): 370.

13.

See also, Inge van Vijfeijken, “Contours of a Modern Inheritance and Gift Tax,” Intertax 34, no. 3 (2006): 151.

14.

Id.

15.

See also, Guglielmo Maisto, “General Report: Death as a Taxable Event and its International Ramifications,” in Cahier de droit fiscal international 95b, ed. IFA (The Hague: Sdu Uitgevers, 2010), 33.

16.

According to the OECD, “[l]ow revenues reflect the fact that inheritance/estate and gift tax bases are often narrowed by numerous exemptions and deductions, and avoidance opportunities are widely available.” OECD, The role and design of net wealth taxes in the OECD (Paris: OECD Tax Policy Studies, no.26, 2018), 23.

17.

See also, J.F. Avery Jones, “A Comparative Study of Inheritance and Gift Taxes,” European Taxation 34 (October/November 1994): 335.

18.

According to the OECD revenue statistics, tax revenue from inheritance and estate taxes represented on average in 2018 0,4% of the total tax revenue earned in each OECD member country (OECD – average). See OECD revenue statistics, accessed January 29, 2020, https://stats.oecd.org/Index.aspx?DataSetCode=REV.

19.

See also Lynne Oats, Angharad Miller and Emer Mulligan, “Principles of International Taxation” (Haywards Heath, Bloomsbury Professional, 2017), 7: “Wealth taxes are generally not imposed for their revenue-raising capabilities, but rather for the purposes of equality and effectiveness.”

20.

Louis Eisenstein, “The Rise and Decline of the Estate Tax,” Tax Law Review 11, no. 22, (1956): 253.