Alleged high administrative costs are often confronted with the relatively low inheritance tax revenues registered in most countries. This high cost/low tax revenue relation appears to be inefficient. The administrative costs around inheritance and gift tax primarily arise around identification and valuation of the transferred wealth and compliance cost (to ensure the tax is actually paid). As for valuation, some property such as artwork or jewellery but also shares in non-listed companies may be difficult to value and thus create an extra administrative burden. Given these high administrative costs and that the tax revenue of inheritance taxes is meager often, it doesn’t seem too surprising that some countries have abandoned their inheritance tax based on efficiency grounds (e.g. New Zealand).
Huge revenue potential
The question is: is it a natural law that inheritance taxes are inefficient due to low tax revenue and high administrative burden? This does not seem very likely. First, inheritance tax revenues could be a major – if not the major – source of tax income of most governments, if exemption regimes would be changed, tax rates increased and further progress against tax evasion be made. The potential of this tax is huge. In fact, one can argue it is the tax with the largest possible tax revenue we have. All other taxes indirectly draw from the same source – wealth. But it is only inheritance taxes for which tax rates beyond 50% and up to confiscatory rates of 100% can be justified in a social-liberal society.
A limitation to the tax revenue could only be a substantial tax-free allowance (as proposed by startequal) even when combined with confiscatory 100% inheritance tax for estates beyond the allowance. Such a scheme could over the years lead to a much more widely distributed wealth, in which an increasing number of estates would fall below the 1 million € mark, and only few estates beyond that. This would reduce tax revenue over time.
There is a second argument against the alleged inefficiency of inheritance and gift taxes: the existing exemption schemes make some inheritance and gift tax rate regimes complicated and thus an administrative burden. Reducing these tax exemptions could thus both increase the tax base and decrease administrative cost, leading to a double positive effect on tax efficiency.
A self-collecting tax
As for the allegedly high administrative costs, a recent survey of the literature finds that inheritance tax has lower administration and compliance costs than other wealth taxes, primarily because it is only levied once in a lifetime or only rarely in the case of gifts. Also, some of the costs are unavoidable fixed costs that occur at the end of life when property is transferred no matter whether an inheritance tax is applied or not. For artwork and jewellery, the valuation difficulties are found to be overstated because fairly transparent markets would exist.
Even where valuation difficulties remain, countries have found pragmatic ways to deal with it. As an example, some countries value household items as a percentage of the total value of the housing assets, where it would be too complicated to assess the value of the goods one by one.
Lastly, inheritance taxes are much older than e.g. income taxes precisely because they were relatively easy to administer. As we can read in a historical review about inheritance taxes, “historically, inheritance taxes have required much less bureaucratic capacity to collect.” A tax official is quoted referring to the tax as “self-collecting”.
We can summarise that it is by no means a natural law that inheritance and gift taxes need to come with a prohibitively high administrative burden. Especially if exemption regimes were reduced and simplified and the tax rates increased considerably up to confiscatory rates, the administrative burden would shrink to negligible amounts in relation to the massive tax income potential.