The model of the Welfare State, adopted nowadays by most European democracies, tends to be demanding when looked at from the point of view of raising public revenue. In fact, it is essential for the State to be able to promote free and universal access to the National Health Service, basic schooling for all students or even pensions for all those who can legally benefit from them. But all this – and much more – represents a heavy budget for the State, at least on the expenditure side.
Hence, at this point – and in a trend that is aggravated by inflation and the instability of the major international economies – we have been thinking more and more about how to guarantee the balance of State finances in order to bring expenditure closer to revenue, even when the Social State is being put under pressure. And here, tax is almost always called upon to take its place, through the search for new ways of raising public revenue through taxation.
Inheritance taxation inevitably arises as an (easy) way of balancing State finances, given that, currently, in Portugal, the most common beneficiaries of inheritances, such as the spouse, unmarried partner, descendants and ascendants, are exempt from Stamp Duty. Could inheritance taxation be, then, a way of solving the great pressures on public revenue to which the Welfare State is subject to today? Is it correct to reduce – or even eliminate – the said exemption, so that a tax rate can be applied to everyone (in Portugal, corresponding to 10%)?
On the one hand, there are those who argue that inheritance taxation is perfectly admissible, based on some of the following arguments: (i) increase in the public revenue to be obtained, (ii) reach of accumulated wealth that no other tax can achieve, (iii) creation of equality between transfers in life and by death or (iv) guarantee of the progressive system of taxation, according to the idea that the more assets there are, the more tax will have to be borne.
On the other hand, there are those who argue that inheritance taxation cannot emerge as an additional means of raising of public revenue based on the following arguments: (i) penalisation of intergenerational success by transferring the burden of the tax to the successors, (ii) loss of international attractiveness, (iii) inefficiency in raising public revenue and (iv) confusion of the ownership of assets with liquidity for tax payment.
According to the OECD ([1]), there are strong equity arguments in favour of inheritance tax, with evidence showing that inheritance taxes can improve equality of opportunity and reduce wealth and inequality, arguing that in countries where income tax rates are lower, inheritance tax rates could be higher.
In our opinion, we believe that inheritance taxation should not be the solution to solve the State’s public revenue needs. On the one hand, we consider that taxing inheritances leads to discouraging savings, investment and entrepreneurship, since the owner of the assets is aware that, at the time of his death, these will give rise to taxation of his successors. On the other hand, liquidity problems may arise at the time of tax payment, given that, as is common knowledge, the ownership of the assets does not always correspond to the direct ownership of monetary values.
However, and although we do not follow the OECD conclusions, we believe that the current Portuguese inheritance tax system – which exempts inheritance from stamp duty when the beneficiary is a direct family member and taxes it when the assets are destined to more distant family members – tends to create incentives so that, whenever possible, the inheritor concentrates the transfer of his assets to more direct family members, even if this is not his immediate wish. It seems to us then that, in this aspect, a greater neutrality of the tax will be necessary, since it tends to shape the behaviour of the inheritor, damaging what would be his main will and the interests of beneficiaries other than direct family members.
In conclusion, we consider that inheritance taxation does not seem to be the solution to the pressing needs of public revenue in the different States, for the reasons we have defended above. Furthermore, we believe that mixed taxation systems – which choose to tax certain beneficiaries to the detriment of others – create inequalities and forms of tax evasion, by shaping the behaviour that the inheritor may assume. If the State’s needs for public revenue are indeed real, then other forms of taxation should be considered, which may take – in our opinion – more equitable, proportional and efficient shapes.
[1] OECD (2021), Inheritance Taxation in OECD Countries, OECD Tax Policy Studies, OECD Publishing, Paris.
Francisco Ludovino Reis
26/05/2022