Inheritance taxes are too small a proportion of many governments' revenues and need to rise in the wake of the Covid pandemic, according to a new (11 May) report by the Organisation for Economic Cooperation and Development (OECD).
The report, called ‘Inheritance Taxation in OECD Countries', compared inheritance, estate and gift taxes across the 37-member OECD, and explored the potential role these taxes could play in raising revenues, addressing inequalities and improving efficiency of future tax systems.
It found that on average, the inheritances and gifts reported by the wealthiest households (top 20%) are close to 50 times higher than those reported by the poorest households (bottom 20%).
Levying an inheritance tax on a lifetime basis - on the overall amount of wealth received by beneficiaries over their lifetime through both gifts and inheritances - would be particularly equitable."
Pointing out that inheritance taxes, particularly those that target relatively high levels of wealth transfers, can reduce wealth concentration and enhance equality of opportunity, it also noted that inheritance taxes generally generate lower efficiency costs than other taxes on the wealthy, and easier to assess and collect than other forms of wealth taxation.
A majority (24) of OECD countries currently levy inheritance or estate taxes, but only 0.5% of total tax revenues were sourced from inheritance, estate and gift taxes on average across the countries that levied them.
Generous tax exemptions and other forms of relief were a key factor limiting revenue from these taxes, according to the report.
In addition to limiting revenue, relief provisions primarily benefit the wealthiest households, reducing the effective progressivity of inheritance and estate taxes, it argued, with individuals often able to pass on significant amounts of wealth tax-free to their close relatives thanks to high tax exemption thresholds.
Tax relief was also common for transfers of specific assets such as the main residence, business and farm assets, pension assets, and life insurance policies.
In a number of countries, inheritance and estate taxes could also largely be avoided through in-life gifts, due to their more favourable tax treatment.
This reduced the number of wealth transfers that are subject to taxation, sometimes significantly so.
Across eight countries with available data, the share of estates subject to inheritance taxes was lowest in the United States (0.2%) and the United Kingdom (3.9%) and was highest in Switzerland (12.7%) (Canton of Zurich) and Belgium (48%) (Brussels-Capital region). Click here to see full chart comparison.
Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, said: "While a majority of OECD countries levy inheritance and estate taxes, they play a more limited role than they could in raising revenue and addressing inequalities, because of the way they have been designed.
"There are strong arguments for making greater use of inheritance taxes, but better design will be needed if these taxes are to achieve their objectives."
The report highlighted the wide variation in inheritance tax design across countries, with the level of wealth that parents could transfer to their children tax-free ranging from close to $17,000 in Belgium to more than $11m in the United States.
A wide spectrum of tax rates was also evident with a majority of countries using progressive tax rates, one-third on flat rates and widely varying tax rate levels.
The report proposed a range of reform options while noting that reforms would depend on country-specific circumstances.
There were "strong fairness arguments in favour of an inheritance tax levied on the value of the assets that beneficiaries receive, with an exemption for low-value inheritances.
"Levying an inheritance tax on a lifetime basis - on the overall amount of wealth received by beneficiaries over their lifetime through both gifts and inheritances - would be particularly equitable and reduce avoidance opportunities but could increase administrative and compliance costs.
"Scaling back regressive tax reliefs, better aligning the tax treatment of gifts and inheritances and preventing avoidance and evasion are also identified as policy priorities" it said.
To make these taxes more acceptable by the public at large, the report underlined the need to provide people with information on inequality and the way inheritance and estate taxes work, as these tend to be misunderstood.
"Inheritance taxation is not a silver bullet, however," said Saint-Amans. "Other reforms, particularly in relation to the taxation of personal capital income and capital gains, are key to ensuring that tax systems help reduce inequality. The OECD will be undertaking new work in that area, in particular as the progress made on international tax transparency and the exchange of information is giving countries a unique opportunity to revisit personal capital taxation."