A new proposal - eliminate inheritance taxes and replace them with a 1% tax on net wealth

Inheritance taxes are, in principle, a way of taxing wealth. And, on paper, they can be very high. The top rate to direct heirs in OECD countries can be very high as shown by this table that I found here.

1. Japan 55%
2. South Korea 50%
3. France 45%
4. United Kingdom 40%
5. United States 40%
6. Spain 34%
7. Ireland 33%
8. Belgium 30%
9. Germany 30%
10. Chile 24%
11. Greece 20%
12. Netherlands 20%
13. Finland 19%
14. Denmark 15%
15. Iceland 10%
16. Turkey 10%
17. Poland 7%
18. Switzerland 7%
19. Italy 4%

But in many other OECD countries there is no inheritance tax. They include Australia, Austria, Canada, Estonia, Hungary, Israel, Luxembourg, Mexico, New Zealand, Norway, Portugal, Serbia, Slovenia, the Slovak Republic and Sweden.

Even in the countries with high inheritance taxes, the actual amounts raised are small. This table from the OECD shows that only four countries raise more than 1% of tax revenue from inheritance taxes - Korea, Belgium, France and Japan. And on average, only 0.5% of total tax revenue came from inheritance, estate and gift taxes in the countries that  levy such taxes. The countries with 0% tax rates obviously get nothing from such schemes.

The reason seems to be fairly clear. There are a wide range of tricks that wealthy people can use to avoid paying such taxes. Basically, you would have to be really stupid to pay the maximum rates of over 40% seen in France, the UK and the USA.

For example, in France, if you donate property to your descendants several years earlier, you can avoid paying taxes when you die. It may cost several thousand euros to do the transfer, but in the long run, it is an extremely effective way of getting away with paying no tax.

To quote the OECD report, "the design of inheritance, estate and gift taxes reduces the effective tax rate", and "there is evidence that in some countries, the wealthiest households are taxed at lower effective tax rates". This is illustrated in this figure for the UK, where it can be seen that while estates sometimes pay around 20% tax, it drops to only 10% for the biggest estates. 

And the report lists many of the "tricks" used to reduce the effectiveness of taxation. They include regular renewal of gift tax exceptions under the tax threshold, bequeathing tax-favoured assets such as family businesses, and concealing assets offshore. The UK has many skilled tax advisors who can explain how to set up trusts to avoid taxation!

So, what would I recommend?

Simple. Scrap all inheritance taxes and replace them all by the universal 1% on net assets. That would mean that the government would get income every year rather than trying to get money from rich people when they die. There would be no need to have special exceptions for the transfer of the family residence to the next generation. Indeed, the amount of net wealth tax paid by an entire family composed of grandparents, their offspring, and the following generations would be simply a question of how much wealth is held, and the degree to which those assets are cancelled out by debt.

So much simpler and easy to understand.