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Wealth transfer taxation: an empirical investigation

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Abstract

We present an empirical model of wealth transfer taxation in the revenue systems of the G7 countries—Canada, France, Germany, Italy, Japan, the UK, and the US—over the period from 1965 to 2009. Our model emphasizes the influences of population aging and of the stock of household wealth in an explanation of the past and likely future of this tax source. Simulations with the model using U.N. demographic projections and projections of household wealth suggest that even in France and Germany where reliance on wealth transfer taxation has been increasing for part of the period studied, wealth transfer taxes can be expected to wither away as population aging deepens over the next two decades. Our results indicate that recent tax designs that rely upon the taxation of wealth transfers to preserve equity in the face of declining taxation of capital incomes may be, in this respect, politically infeasible for the foreseeable future. We conclude by using the case of wealth transfer taxation to raise the general question of the extent to which the consistency of a proposed reform with expected political equilibria ought to play a role in the design of a normative policy blueprint.

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Notes

  1. The G7 countries are Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

  2. See also Boadway et al. (2010) and Boadway (2002).

  3. An increase of wealth transfer taxes is suggested also by Alvaredo et al. (2013) who argue that wealth transfer taxes depend on the role of inheritance in determining lifetime inequality. In Europe, for instance, as inheritances are again becoming an important factor in wealth transmission and lifetime inequality, people not receiving “large” bequests become more interested in having more wealth transfer taxation.

  4. See OECD (2008) for an analysis on income distribution and poverty in OECD countries. See also Piketty and Saez (2007) for evidence about the historically significant, but declining role of estate taxation in the progressivity of the US tax system.

  5. For textbook discussions of this point, see, for example, Musgrave (1959) and the ’Meade Report’ (Institute for Fiscal Studies 1978), Chap. 15.

  6. The question of whether normative public finance needs political economy has been raised before. See Winer and Shibata (2002) and the debate therein between Boadway and Hettich (2002), and Hettich and Winer (2006). In broader contexts, arguments for taking political feasibility or consistency with current and expected political equilibria into account in normative policy design have been made over the years by McKee and West (1981), Dixit (1997), Acemoglu and Robinson (2013), and Rodrik (2014) among others. See Castanheira et al. (2012) for a review of political motives behind tax reforms.

  7. See also Glennerster (2011) on the failure of the Labour government to adopt the promised wealth tax in 1974–1976 in the UK.

  8. On the structural problems of estate and gift taxes in the US see Pechman (2005).

  9. In Canada, federal wealth transfer taxes were abolished in 1972 and deemed realization at death began as part of a new capital gains tax regime. Unfortunately there are no data on revenues from the deemed realization at death component of capital gains taxation. See Duff (2005) for more details on the abolition of wealth transfer taxes in Canada, Australia and New Zealand.

  10. Scheve and Stasavage (2010) focus on the more general relationship between mass warfare and redistributive public policies through progressive taxation.

  11. In countries characterized by high inequality and agrarian economic structure, such as in Latin America, autocracy can help to explain the lower significance of bequest taxes.

  12. We are grateful to Craig Brett for emphasizing this point (personal communication).

  13. All we really need is that wealth transfer taxation be relatively more important to the old than to the young. The assumption of the partial derivative being zero for the old allows this idea to be incorporated without much loss of generality.

  14. The equilibrium choice of policies is Pareto efficient in this formulation. It is possible to introduce inefficiency into the equilibrium, following (Hettich and Winer (1999), Chap. 6) and others. But we do not do so here. Unless we can add into the estimating equation such factors as misleading political advertising that underlie electoral inefficiency, data which we do not have, such an analysis does not lead to a different estimating equation.

  15. We shall see in the simulations presented later that some wealth transfer taxes may disappear as they become politically useless relative to other policy instruments.

  16. Only the US and the UK have an average annual growth rate of the share of the old over the total population lower than the one of France and Germany, respectively.

  17. See the data appendix for details of all data sources. Appendix Table 12 presents the summary statistics of all relevant variables for the 1965–2009 period.

  18. In order to capture the post-1945 erosion of solidarity, we build a linear time trend as follows: for each country, in 1945 this index takes a value which corresponds to the total number of deaths related to the war (http://www.secondworldwarhistory.com/world-war-2-statistics.asp), and then it linearly goes to zero in 1975. In other words, after thirty years, solidarity is assumed to become less and less relevant.

  19. Ancillary estimation results (available upon request) show a positive and statistically significant correlation of \(r-g\) with wealth taxation relative to GDP in our sample.

  20. See Kolnick and Anderson (2009) and Tan (2011).

  21. The international openness variable can be also considered to be a proxy for the degree of international tax competition.

  22. In particular we are controlling for the left (right) cabinet portfolios as percentage of all cabinet portfolios, left (right) government party seats as percentage of all legislative seats, left (right) party legislative seats as percentage of all legislative seats, and finally left (right) party votes as percentage of total votes.

  23. Of course household wealth is accumulated over years, but we are not able to identify the underlying process of accumulation in this paper. It could be interesting to perform a dynamic analysis of wealth transfer tax revenues related to the accumulation process of household wealth. We will leave this to future research.

  24. The use of lagged variables may mildly solve the endogeneity issue, but we cannot provide a test of this possibility.

  25. Top inheritance tax rates are defined as follows: the top rate applied to a single descendant who receives an inheritance in cash. In this case, due to data availability, the time period investigated is from 1960 to 2000.

  26. We note that the general nature of the results reported below continue to hold when other specifications from Table 4 are employed.

  27. Due to the absence of data in deemed realization at death which replaced death duties in 1972, we are not considering Canada in our predictions.

  28. This is not reflected in Table 10 which truncates the predicted values at zero.

  29. Looking at Japan, when we consider both the demographic and the base effect we find that the demographic effect will prevail from 2017 to 2022 (i.e., we observe a reduction of wealth transfer taxes), but then the base effect will mildly prevail (i.e., we observe a small increase in wealth taxes) even if the predicted values for 2027 and 2032 are lower than the 2009 level.

  30. Some further uncertainty is added by the fact that, like all other work on modeling the tax mix, the estimating equations cannot track the entire complexity of the tax skeleton, leading to underestimation of residual tax revenues even when a tax base is officially eliminated at some point in time, as in Canada after 1972.

  31. It is possible that the introduction or enhancement of deemed realization at death or some sort of carryover regime may partly substitute for the decline in explicit wealth transfer taxation. So would a move toward some kind of global capital income tax, though that is probably a more distant possibility.

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Correspondence to Paola Profeta.

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Earlier versions of this paper were presented at the annual conference of SIEP, Pavia, September 2012; the National Institute of Public Finance and Policy, Delhi, January 2013; the Institute for Social and Economic Change, Bangalore, January 2013; and the IIPF Congress in Taormina, Italy, August 2013. We thank Christoph Schinke and all participants for their helpful comments. We also thank Craig Brett, Jim Davies, Carlo Fiorio, Simone Ghislandi, Riccardo Puglisi, and two anonymous referees for helpful comments on earlier drafts, and Viviana Perego and Luca Riva for research assistance. Profeta thanks IDEP and CEPRA at the University of Lugano for their hospitality during the 2012–2013 academic year.

Appendix

Appendix

1.1 Mnemonics and data sources

  • Wealth_tax/tax_revenue: estate, inheritance and gift taxes divided by total tax revenue (OECD Statistics, various years);

  • Wealth_tax/GDP: estate, inheritance and gift taxes divided by GDP (OECD Statistics, various years);

  • Top inheritance tax rates: the top rate applied to a single descendant who receives an inheritance in cash (Scheve and Stasavage 2012b);

  • Household_wealth: household net wealth (OECD 2010 and earlier issues; Davies et al. 2011);

  • Population_over65: population aged 65 and above as a percentage of the total population. Population is based on the de facto definition of population, which counts all residents regardless of legal status or citizenship—except for refugees not permanently settled in the country of asylum, who are generally considered part of the population of the country of origin (World Bank Development Indicators, various years);

  • Real_gdp: real GDP per capita (OECD Statistics, various years);

  • Public_expenditure/GDP: public expenditure over GDP (OECD Statistics, various years);

  • Population_density: population density is midyear population divided by land area in square kilometers. Population is based on the de facto definition of population, which counts all residents regardless of legal status or citizenship—except for refugees not permanently settled in the country of asylum, who are generally considered part of the population of their country of origin. Land area is a country’s total area, excluding area under inland water bodies, national claims to continental shelf, and exclusive economic zones. In most cases the definition of inland water bodies includes major rivers and lakes (World Bank Open Data);

  • Openness: the sum of exports and imports divided by GDP. This indicator measures a country’s “openness” or “integration” in the world economy. It represents the combined weight of total trade in its economy, a measure of the degree of dependence of domestic producers on foreign markets and their trade orientation (for exports) and the degree of reliance of domestic demand on foreign supply of goods and services (for imports) (OECD Statistics, various years);

  • Union_density: trade union density corresponds to the ratio of wage and salary earners that are trade union members, divided by the total number of wage and salary earners (OECD Labor Force Statistics). Density is calculated using survey data, wherever possible, and administrative data adjusted for non-active and self-employed members otherwise. Data are expressed in percentages (OECD Statistics, various years);

  • Natural_resources: total natural resources rents (% of GDP), that is, the sum of oil rents, natural gas rents, coal rents (hard and soft), mineral rents, and forest rents as a percentage of GDP (World Bank Open Data);

  • KOF_index: KOF globalization index (http://globalization.kof.ethz.ch/);

  • FDI: foreign direct investment, net outflows (% of GDP) (World Bank Open Data);

  • Agr_labor_force: employment in agriculture (% of total employment) (World Bank Open Data);

  • Left (right)_party_cabinet_portfolios: left (right) cabinet portfolios as percentage of all cabinet portfolios (“Electoral, Legislative and Government Strength of Political Parties by Ideological Group in Capitalistic Democracies, 1950–2006: A database” by D. Swank);

  • Left (right)_government_party_seats: left (right) government party seats as percentage of all legislative seats (“Electoral, Legislative and Government Strength of Political Parties by Ideological Group in Capitalistic Democracies, 1950–2006: A database” by D. Swank);

  • Left (right)_party_legislative_seats: left (right) party legislative seats as percentage of all legislative seats (“Electoral, Legislative and Government Strength of Political Parties by Ideological Group in Capitalistic Democracies, 1950–2006: A database” by D. Swank);

  • Left (right)_party_votes: left (right) party votes as percentage of total votes (“Electoral, Legislative and Government Strength of Political Parties by Ideological Group in Capitalistic Democracies, 1950–2006: A database” by D. Swank).

See Tables 11 and 12

Table 11 Summary statistics
Table 12 Correlation matrix

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Profeta, P., Scabrosetti, S. & Winer, S.L. Wealth transfer taxation: an empirical investigation. Int Tax Public Finance 21, 720–767 (2014). https://doi.org/10.1007/s10797-014-9325-0

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