The case for inheritance taxes-Commentary in the Telegraph Journal - 8/23/2018
ROD HILL COMMENTARY
Should Canada have a tax on large gifts and inheritances? This question is unlikely to go away. Increases in income inequality in recent decades, fuelled in particular by increases in very high incomes, will inevitably lead to increased wealth inequality. High levels of economic inequality are unhealthy for a society, as a glance at the deteriorating situation in the United States makes all too clear.
There is a simple fairness case to be made. Under the current tax system, an individual can receive millions in income in the form of gifts and inheritances, without paying a cent in tax. Why should this form of income receive such special treatment? This additional income is truly “unearned.”
These lucky people are winners of what billionaire Warren Buffett calls of the “Ovarian Lottery.” They typically already have substantial incomes thanks to the advantages of their birth. Long before they receive any inheritances, the children of very wealthy parents already receive an enormous advantage in life – in many cases, expensive private school educations, jobs through parental connections, etc.
A recent report from the Canadian Centre for Policy Alternatives suggested a 45 percent tax on transfers over $5 million. This rate is in the midrange of similar taxes in the United States, the United Kingdom, France and Germany.
Such a tax should apply to the total of gifts and inheritances that an individual receives over his or her lifetime. This is more appropriate than taxing an individual’s estate at death, because it focuses on how much each individual receives.
Needless to say, such proposals meet with strident opposition. No exception was the recent opinion piece, “Canada doesn’t need a death tax” (Aug. 20, A7) by Aaron Wudrick of the Canadian Taxpayers Federation, an outfit that never met a tax it didn’t want cut or abolished, in the service of its long-term goal of bare-bones government.
According to Mr. Wudrick, the prospect of having one’s gifts and bequests taxed would create “strong perverse incentives against long-term saving and investment” resulting in “less economic growth, less job creation, and slower improvements in living standards for all.” Really?
The evidence for this claim is lacking from countries that have similar taxes. Economics research has shown that it is possible that the very wealthy could have more incentive to save and invest if their bequests have altruistic motives. For example, if someone would have given $20 million to her child and now $9 million would be paid in tax, she could well be motivated to save more to increase the size of the after-tax bequest.
From the point of view of the recipients, American research has shown that larger inheritances are followed by more consumption, less work and less saving. If inheritances are reduced by taxation, recipients’ work effort and savings should increase.
In short, the predictions of gloom and doom seem wildly overstated.
Opponents also claim that the tax will be ineffective because of widespread measures to evade it. It is true that a corrupt financial sector has long facilitated tax evasion by helping very wealthy individuals hide assets abroad. The Canada Revenue Agency has recently made a very rough estimate that Canada’s wealthiest families have hidden assets abroad worth about $240 billion, evading $3 billion in taxes annually.
Still, the problems of evasion should not be overstated. Even the very wealthy in the United States, who have access to such financial services, are still paying $30 billion a year in estate taxes.
In their 2010 book, The Trouble with Billionaires, Linda McQuaig and Neil Brooks point out an important benefit of the kind of gift and inheritance tax that they advocate. At the time, there were about 100 Canadians worth more than $500 million.
In their view,“Taxing these grand fortunes would help prevent a small wealthy elite from exerting too much influence over our democracy. A small number of spectacularly wealthy families have dominated Canada’s economic landscape for many decades, and our failure to tax their inter-generational transfers in recent years has only fuelled the growth of old and new dynasties. An inheritance tax is essential if we want to prevent them from turning into a kind of permanent aristocracy.”
This creates a further question: If we had a federal inheritance tax, what should be done with the tax revenues?
McQuaig and Brooks propose that the gift and inheritance tax revenues be used to provide an education trust fund for every Canadian child, available to them after the age of 16. At the tax rates they suggest, they estimate this would provide every child with $16,000 to use for education or training.
They wrote: “This would mean that very large fortunes accumulated in previous generations would be taxed so that children in future generations would have a greater chance to develop their talents and skills to the fullest. It would amount to a direct transfer of wealth, taking from the very richest families and giving improved education possibilities to all Canadian children as they prepare to enter adulthood.”
Who could object to such a worthy goal?
Rod Hill is an economics professor at UNB’s Saint John campus.