Why “death taxes” have fallen out of favour

By C.W.

ONCE they were feared. Only a few decades ago inheritance-and-estate taxes took a big bite out of the largest fortunes when their owners passed on. Before the second world war Britons were more likely to pay inheritance tax on death than they were to pay income tax while living. Around the same time the top rate of estate tax in America was 77%. How things have changed. America could be on the verge of eliminating its estate tax entirely. Britain is cutting the number of people who are subject to the tax each year by a third. A raft of countries, from India to Norway to Australia, have eliminated their inheritance taxes entirely. Why have governments all over the world turned away from death duties?

The economic argument in favour of cutting death duties is weaker than you might suspect. There is little evidence that lower death duties encourage saving or investment; nor do people work harder. Instead, research suggests that a large proportion of bequests from one generation to the next are “accidental”. People have saved money not to pass on, but to cover unexpected costs while they are alive. Meanwhile, there is little evidence that high death duties prompt rich folk to flee to lower-tax jurisdictions, which was one of the main justifications used by pro-repeal Swedes, whose country abolished its inheritance tax in 2004. Cutting death duties also represents a loss of tax revenue.

Perhaps a better explanation for why governments have turned against death duties is simply that the public hates them. Inheritances are deeply personal and the biggest single gift that many give to causes they believe in and loved ones they may have cherished. Many see the estate tax as a “double tax”, since it is often paid on income that has been subject to income tax. This is not the strongest of arguments, though. If avoiding double taxation were a requirement of good policy, then governments would need to abolish sales taxes. Nonetheless, politicians have realised that they are on to a winner. Both George W. Bush and Donald Trump found, as presidential candidates, that promises to repeal the estate tax proved highly popular.

Yet some economists worry about the trend towards tiny or even zero death duties. The rich world has high levels of wealth inequality. Half of Europe’s billionaires have inherited their wealth, for instance. The annual flow of inheritances in some rich countries is around 10% of GDP, far above its level a few decades ago. If governments are keen to avoid the creation of a hereditary elite, they might want to think again.

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