Inheritance tax to help ‘tackle inequality and improve public finances’

Inheritance could play a stronger role in addressing inequality and improving public finances, according to a new report from the Organisation for Economic Co-operation and Development (OECD).

The report stated that taxation on inheritance can be an important instrument to address inequality, particularly as there is persistently high wealth inequality and new pressures on public finances linked to the Covid-19 pandemic.

The Organisation for Economic Co-operation and Development (OECD) was established in 1961 to promote economic growth and world trade. The 36 countries in the OECD include the US, the UK, France, Germany, Australia, New Zealand and Canada.

High degree of wealth concentration

The OECD says that inheritance taxation in OECD countries highlights the high degree of wealth concentration in OECD countries as well as the unequal distribution of wealth transfers, which further reinforces inequality.

Across those countries, on average, the inheritances and gifts reported by the wealthiest households (top 20 per cent) are almost 50 times higher than those reported by the poorest households (bottom 20 per cent).

The report points out that inheritance tax – particularly one that targets relatively high levels of wealth transfers – can reduce wealth concentration and enhance equality of opportunity. It also says that inheritance taxes in general generate lower efficiency costs that other taxes on wealthy people and are easier to access and collect than other taxes on the rich.

Inheritance tax ‘typically raises little money’

Most OECD (24) countries have inheritance or estate taxes, but those taxes typically raise very little money. On average, on 0.5 percent of total tax revenues come from inheritance, estate and gifts taxes.

There is variation in the inheritance tax regimes employed by OECD countries – from levels of about $17,000 that parents can transfer to their children to tax-free to more than $11 million in the US. The tax rates are also different. Most countries apply progressive tax rates, but a third apply a flat rate, and all those rates vary widely.

Reform options put forward by the OECD include suggestions for enhancing revenue potential and the fairness of inheritance and estate taxes. Inheritance tax should be levied on the total value of the assets the heirs receive, with low-value inheritances exempt. The report also suggests inheritance tax could be applied on a lifetime basis on the total amount of wealth received by the beneficiaries in both gifts and inheritance. This would reduce avoidance opportunities, although it would also increase administrative costs.

Pascal Saint-Amans, the director of the OECD Centre for Tax Policy and Administration, said that while most OECD countries applied inheritance and estate taxes, they had a limited role in raising revenue and addressing inequality because of their design.

He added that inheritance tax was not a “silver bullet” and more needed to be done to tax personal capital income and capital gains to make countries’ tax systems fit to reduce inequalities.

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