The OECD is pointing to inheritance taxation as an important tool to address wealth inequality, particularly in the current context of public finance challenges caused by the COVID-19 pandemic, in a new report released on Tuesday.
Inheritance Taxation in OECD Countries provides an overview of inheritance, estate and gift taxes across the 37-member organisation, and explores the role these taxes could play in raising revenues, addressing inequalities and improving the efficiency of tax systems in the future.
The report highlights both the high level of wealth concentration in OECD countries and the unequal distribution of wealth transfers, which further reinforces inequality.
On average, the inheritances and gifts reported by the top 20% wealthiest households are close to 50 times higher than those reported by the poorest bottom 20% households.
The report argues that inheritance taxes, especially those that target relatively high value wealth transfers, can reduce wealth concentration and enhance equality of opportunity.
It also notes that inheritance taxes have generally been found to generate lower efficiency costs than other taxes on the wealthy, and to be easier to assess and collect than other forms of wealth taxation.
“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,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration.
“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.”
A majority of OECD countries, 24 out of 37, currently levy inheritance or estate taxes. But these taxes typically raise very little revenue. Only 0.5% of total tax revenues are on average sourced from inheritance, estate and gift taxes across the countries that levy them.
This is because of tax exemptions and other forms of tax relief, which primarily benefit the wealthiest households, reduce the effective progressivity of inheritance and estate taxes, the report noted.
As a result of high exemption thresholds, individuals are often able to pass on significant amounts of wealth to their close relatives tax-free.
Tax relief is 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 can also largely be avoided through in-life gifts, due to their more favourable tax treatment.
The report shows the wide range of inheritance tax designs across countries. The level of wealth that parents can transfer to their children tax-free ranges from close to US$17,000 in Belgium to more than US$11 million in the United States.
Tax rates also differ across the countries, with the majority applying progressive tax rates and one-third of countries using flat rates.
As a result, there are significant differences in the extent to which wealth transfers are taxed. Across eight countries that have available data, the report found that the share of estates subject to inheritance taxes was lowest in the United States (0.2%) and the United Kingdom (3.9%) while it was highest in Switzerland (12.7%) and Belgium (48%).
The OECD report proposes a number of reforms to enhance the revenue potential, efficiency and fairness of inheritance, estate and gift taxes.
An inheritance tax levied on the value of the assets that beneficiaries receive, with an exemption for low-value inheritances, would be fairer. And levying an inheritance tax on a lifetime basis would be more equitable with fewer opportunities for tax avoidance, the report said. But it acknowledged that it would increase administrative and compliance costs.
Other policy priorities should include the scaling back of regressive tax reliefs, a better aligned tax treatment of gifts and inheritances and measures to preventing avoidance and evasion.
To make these taxes more acceptable by the public at large, the report said, there is a need to provide citizens with information on inequality and the way inheritance and estate taxes work, as these tend to be misunderstood.