June 20, 2021

The differences between the OECD and the right on inheritance tax: from "extols equality" to "confiscatory"


Can a tax be both fair and unfair? This occurs with inheritance and donations, depending on who is consulted. In recent years, the right wing in Spain, both PP and Ciudadanos and Vox, have made an electoral flag of its elimination or of the application of large bonuses that practically cancel it where they have the Government. However, the argument they make about this tax figure contrasts sharply with the position taken after the pandemic by the IMF or, this week, the OECD, who defend its use to prevent the accumulation of wealth and as a formula to fight against the inequities.

The organization that encompasses the main economies of the world published a report last Tuesday in which he made an extensive argument in favor of the inheritance tax to tax wealth, now that raising the taxation of those who have the most to relaunch the economy after the crisis caused by the pandemic. “This tax praises equal opportunities”, defends the OECD report.

The organization explains that “inheritance tax can play an important role in raising revenue, addressing inequalities and improving efficiency.” Specifically, one of the arguments put on the table by the OECD is that world wealth is, to a large extent, inherited and its taxation can help to correct inequalities that drag on and that, without it, can be prolonged in future generations . The organism remarks that inequality is very high and is increasing in some countries during the last decades. Furthermore, inheritances are unevenly distributed among households and this gap increases over time.

The OECD defends that inheritance tax is a more efficient tool with less administrative costs to increase income and improve the equity of the economy than other alternatives. “An inheritance tax, particularly one that targets relatively high levels of wealth transfer, can be an important tool to improve equality of opportunity and reduce the concentration of wealth,” underlines the report released this week.

The agency points out in its report that practically all the countries that compose it have some inheritance tax model, although with great differences between them. In addition, it warns that since the eighties the collection that is made of it by governments has been gradually reduced, so it calls for efforts to increase the weight of this tax on tax revenues. In only four countries does inheritance tax account for more than 1% of tax revenue: Korea, Japan, France and Belgium. Spain is currently slightly above the average, which stands at 0.5%.

The OECD adds that the main reason why the weight of these taxes is so low in developed countries is because “numerous provisions” have significantly reduced the tax bases on which the inheritance tax is applied. It can be said that this is what happens in Spain. The communities have the capacity to apply reductions in the payment of the tax and in some it is already applied in only a small minority of cases. “In addition to significantly reducing tax collection, some of these provisions mainly benefit the richest households, reducing the effective progressivity of inheritance taxes,” says the report, who points out that there has also been “tax avoidance and evasion.” and “confidence in the fairness of the tax has eroded.”

The OECD is not the only international body that has established inheritance tax as a way to reduce inequality in economies. The IMF, last April, placed this tax among the different fiscal tools in the hands of governments to reduce the great social differences that the pandemic has highlighted. Other tools defended by the body were personal income tax itself, wealth taxes or those that tax the profits of large companies.

The arguments of the OECD contrast at all times with those that have been raised in the political debate in recent years in Spain. The right wing has made inheritance tax one of its great tax proposals. Specifically, its elimination or limitation to the maximum. Precisely in the last electoral campaign in Madrid, Isabel Díaz Ayuso included it in her proposals, although his decision only affected 0.16% of the population, 11,000 Madrilenians. “I do not want to attack those who have money and have amassed a good inheritance after a life of work,” he came to assure.

Criticisms of this tax are not limited to the PP, since it is one of the points in which the three parties on the right have a very clear proximity. To give an example, a few weeks ago the Congressional Finance committee rejected a motion by Vox in favor of its elimination. He only received the support of PP and Ciudadanos. The far-right party assured that the tax has “a lack of legitimacy” and “violates constitutional rights.” Those of Casado considered it “unfair and confiscatory”, while Ciudadanos argued that it is “a generator of inequalities” and a “disincentive to saving.”

This proximity with respect to successions has been transferred to the tasks of Government where these three parties have power, such as Andalusia or Madrid. The last Community to make a move in this regard has been Castilla y León, where the PP with Ciudadanos governs. The measure, which limited the application of the tax to the maximum, was widely defended by the chairman of the board, Alfonso Fernández Mañueco, as an incentive to promote economic activity. Ciudadanos, for their part, defended that “it is a tax that especially punishes the working middle class.” Later, the Board recognized that the measure only benefited between 0.2% and 0.6% of the Community’s citizens.

Faced with these arguments, the OECD has defended this week that the application of inheritance tax is “justified” by increasing social mobility and favoring equal opportunities, as, according to the report, the strong link between wealth has been empirically verified and inheritances. The agency considers that the transfer of wealth, whether through donation or inheritance, increases inequality, because “people who have more are more likely to receive an inheritance, and usually receive them of greater value.” The OECD provides an example. The mean inheritance received by households in the least wealthy 20% of the countries for which it had data was between $ 300 and $ 11,000. Among the richest 20% of households the median inheritance was between $ 30,000 and $ 526,000.

In this sense, the OECD ensures that the tax must be “well designed” in order to achieve the objectives of equity and equal opportunities. One of the first proposals he raises is to reduce the exemptions that are applied, especially those for which “there is no clear justification and they tend to be regressive.” However, it does not propose to eliminate them completely, but to limit them to those that are of a lesser amount. From there, the OECD is in favor of applying a progressive withholding, being higher in the cases of larger inheritances.

Despite its defense of inheritance tax, the OECD concludes its report by noting that it is not a “miracle cure” to achieve the objectives of equity and equal opportunities. “No matter how well designed the tax is, it is a limited source of income,” says the agency, although it remarks that this should not be a justification for not betting on its application. For this reason, the report emphasizes that it is necessary that the improvement of this tax be accompanied by other complementary reforms, such as taxes on capital income.

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