2.4.2 The windfall justification (the accidental income theory)

The windfall justification or the justification of the unearned advantage serves as the second justification of death taxation. This justification rests upon the fortuitous nature of acquisitions under the accidental income theory. These acquisitions are sudden and perhaps unexpected accretions of property without labour on the part of the beneficiaries and manifestly increase their ability-to-pay-taxes. According to West, “[i]t is conceivable that where there is an income tax, inheritances might be taxed as income; but on account of their accidental or gratuitous nature it seems more just to subject them to a distinct tax greater in amount than the income tax, or in addition to the property tax.”1 The windfall justification seems also to have been officially recognised by the OECD. In that regard, the OECD notes that “[i]nheritances constitute an unearned advantage for recipients […]. From an equal opportunity perspective, wealth transfers can be viewed as a source of additional opportunity that is not linked to the recipient’s efforts and that should therefore be taxed […].”2

Contrary, however, to the ability-to-pay-taxes justification that justifies the imposition of death taxes at progressive rates depending only on the size of the acquisition concerned, the windfall justification arguably justifies progression depending also on the kinship between the parties involved. This type of progression shows that it is considered fair if states tax incidental and unexpected receipts of wealth and at the same time protect the family property when received by family members. Therefore, the windfall justification dictates that states should tax a mortis causa transfer of property (because it is unexpected), but they should also take into account possible family property considerations (that make a mortis causa transfer of property less unexpected when family members receive the property at hand). As a result, it could be argued that the windfall justification does not only explain why states may seek to levy a death tax but also how states may design such a tax.

The idea of protection of the family property is long-standing, which has been deeply reflected in the law and in religion through the centuries. For example, some authors refer to the Roman vicesima hereditatium, quoting Gaius Plinius Caecilius Secundus who advocated that a 5% tax is tolerable when imposed on distant beneficiaries but it becomes a heavy burden when imposed on the deceased’s close relatives.3 As mentioned in section 2.3, vicesima hereditatium was a tax that was introduced by Emperor Augustus (Lex Julia Vicesimaria) in ancient Rome and consisted of a 5% levy that every Roman citizen had to pay to the Roman army upon any inheritance or legacy left to him, except for property left to a citizen by his nearest relatives, and property below a certain sum. Later, Emperor Trajan ordered the exemption of almost all close relatives. Praising this reform, Pliny the Younger commented that the heavy tax would have been unfair to those who were entitled to their inheritance by birth, kinship, and community of family worship; who had always regarded the property as their own possession, to be passed on from them in turn to their heirs.4

Furthermore, Hauser notes that one of the oldest codes of law, dating from the rule of Hammurabi during the golden age of Babylonia (1792-1750 BC), refers, in places, to a sealed deed, an instrument similar to a trust, which directed property to a family member after one had “gone to his fate.”5 Moreover, Hauser refers to the codifications which occurred in early Roman law in 451 BC, when a delegation went from Rome to Greece to study the laws of Solon, an Athenian statesman, lawmaker and poet. The codification resulted in the so-called “Twelve Tables”, which among other things, addressed inheritance as follows: “[i]f a man dies intestate to whom there is no suus heres,6 let the nearest agnate7 have the property [and] [i]f there is no agnate, let the members of the gens have the property.”8

Finally, Hauser notes that many references in the Old Testament reinforce the importance of inheritance concerning the protection of the family property: “A good man leaveth an inheritance to his children’s children.” “The Lord forbid it me, that I should give the inheritance of my fathers unto thee.” and “The Lord knoweth the days of the upright: and their inheritance shall be for ever”.9

The idea of the protection of the family property is also reflected in modern succession laws (for example, in forced heirship rules10^, 11) and in death tax laws (for example, through subjective tax exemptions to close relatives and spouse and the application of tax rates determined, amongst others, based on the kinship between the deceased and his beneficiaries). It follows that states, taxpayers and legislatures instinctively consider that kinship differentiates a family member from an alien (who does not have family bonds with the deceased). It is perceived in that regard that family members have contributed to the acquired property, and so the acquisition of the deceased’s property becomes less incidental. On the other hand, the acquisition of the deceased’s property by non-family members arguably remains incidental because it is perceived that they have not grown into the perception that the property would be eventually theirs;12 they did not always regarded the property as their own possession; they had not contributed to it; and there was no “natural instinct of the parents to equip the new generation as well as they can”.13 As Hayek notes, “[t]he family’s function of passing on standards and traditions is closely tied up with the possibility of transmitting material goods”.14

Given the abovementioned considerations, West notes that “[o]n the whole, the accidental-income theory is perhaps the most satisfactory explanation of inheritance taxes as they actually exist”.15 Without the windfall justification, death taxation would thus not be defensible as a separate mode of taxation: the size of mortis causa acquired property cannot be said to be a perfect criterion of faculty, which can differentiate a death tax from other taxes levied, based on the size of the property transferred or acquired (e.g. net wealth taxes or capital gain taxes).

I agree with West that the windfall justification should be regarded as the primary justification of death taxation. The windfall justification seems to be the most convincing, complete and unique justification of death 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 acquired by family members (“how to tax”). Therefore, this justification can explain, in my view, progressivity based both 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, a counterargument that one may bring forward is that the death tax laws (and particularly, the inheritance and estate tax laws) deem that a distant relative or a beneficiary without any family connection with the deceased has not contributed to the mortis causa acquired property, which, however, may not always be the case.