One of the most central arguments against inheritance tax is that it will be detrimental to the SME and family business sector (considered to be the stable backbone of many economies) by rendering family-internal company succession impossible. Heirs don’t inherit a company’s value in cash but the value of its shares, representing the physical and intangible assets of the company.
Heirs would struggle to pay high inheritance taxes upfront at the time of death. Also, it is unclear whether the company would remain stable and yield enough profit to earn back the inheritance tax. The risk and financial burden on the heirs would thus be too big and prevent family members from the succession. This, in turn, would force family businesses to be taken over by other companies or investors, leading to market concentration and a decline of the prototypical independent and diverse SME and family business sector. Some businesses could even get into trouble if family-internal succession is impossible and external take-over proves to be complicated. Jobs would be at risk.
The question is: is there any theoretical or empirical backup for this compelling narrative that has kept existing inheritance tax regimes in check? A majority of people in many countries buy into this narrative. Against their own interest, as we shall see.
Debunking a myth: Inheritance taxes are not a threat for family businesses
Despite the prevalent belief that inheritance taxes are detrimental to family businesses and lead to lower employment, the economic literature is of a different opinion.:
There is weak evidence of liquidity problems through inheritance tax payments that harm the company (e.g. reduced investment activity). The current levels of inheritance tax can most often be paid by the existing wealth or cash-like wealth transmitted to heirs alongside the company shares. Even where not, existing or possible tax deferment options (pay taxes in instalments) can eliminate the liquidity risk without touching the inheritance tax itself.  Another viable alternative to shoulder the inheritance tax payment is to sell some of the company shares while keeping the largest share and remaining in control. Should it not be desirable to sell off ownership to the market because of unwanted buyers (competitors, foreign investors), the shares could be given to the state as a direct means of paying the tax debt. As long as the state would remain a silent investor and not intervene in operations, this can also be a good solution.
There is some weak evidence that inheritance taxation reduces the entrepreneurial activity of heirs by decreasing the size of their “venture capital”. However, suppose inheritance taxation is linked to financing education, universal basic incomes, basic inheritances for everyone, or other progressive causes. In that case, a higher entrepreneurial activity among the many (the underprivileged) should by far outweigh the minor reduction of entrepreneurship by the few (the privileged).
Lastly, inheritance taxation can be detrimental to family businesses and employment if the heir is a non-optimal candidate for company succession. There is a solid number of studies indicating that family succession can lead to underperforming companies. Against this background, higher inheritance taxes would lead to more efficient company successions and more competent business executives, leading in turn to better-performing businesses and higher employment.
To sum up: there is no solid theoretical or empirical ground to be afraid of inheritance taxes regarding SMEs, family businesses, succession and employment. A smartly designed inheritance tax with long tax deferment options is compatible with family business succession and saving jobs.
What if we had 100% inheritance tax?
We have learned above that with the currently very moderate levels of inheritance tax there is no theoretical and empirical evidence that they negatively affect SMEs and jobs. On the contrary, we saw some arguments that a more efficient and biased succession could boost jobs.
But what if we increased inheritance taxes to more substantial levels, up to 100%? Will this then be the end of family businesses? If you have to pay 100% inheritance tax, is that factually a prohibition of a family-internal succession of companies? The short answer is: No, it isn’t,
Only because you have to pay for something, it doesn’t mean it can’t be done. Non-family members interested in taking over a company also pay for it, so why could a family member not do the same? One likely problem will be liquidity issues. A young person taking over a grown-up company will often not have the financial means to pay the substantial inheritance taxes in cash. Therefore, the deferred payment of inheritance taxes should be possible and become the standard, even across long time spans over 10,20 or more years up to the full lifespan of the heir. The reasoning is: In a meritocratic society, nobody deserves to own a company or other substantial assets upfront. But you can gain the legit ownership through hard work. If you take over a company and lead it successfully for multiple decades, you can use parts of the profits to cover your inheritance taxes. You “buy back” the company from society and truly earn it.
We can see from some simple calculations that it should be possible for heirs to “earn back” their inherited companies through profits, irrespective of company size and the heir’s non-company wealth. If we follow a standard company valuation technique, we can say that a company value is approximated with a multiple of 10 of its profits. This would mean a company making ten million€ in annual profit (across the last couple of years) will be valued at around a 100million€ company value. An heir who would have to pay 100% inheritance tax would thus, over a long period of time, somehow need to manage to come up with 100m€.
Can this work? If we assume that the heir will lead the company similarly well as it was run before, we would take profits to be stable. Thus, after 10 years, the company would have accumulated 100m€ in profit and could, in theory, pay the inheritance tax. However: A company cannot just distribute all its profits to its shareholders. It needs to reinvest some part (lets say 33%) and keep another part as reserve for unforeseen circumstances (another 33%), so it may only distribute 33% of profits to its shareholder. This means it will take our heir 30 years to earn back its inherited company. Let us assume the average lifetime working years to be 35 years. We can thus see: it should, in theory, be possible for any heir to pay 100% inheritance tax and earn back a company no matter the size.
The above exemplary calculation deliberately doesn’t take into account any details such as corporate taxes, taxes on distributed profits, etc. These could easily prolong the earn-back period further beyond the average lifetime working years. Therefore, in a 100% inheritance tax regime, exemptions of corporate or capital taxes could be considered to ensure taxation won’t be prohibitive and it will remain possible (on average) to earn back a company in a lifetime. We also didn’t consider interest rates on tax payments, but interest rates to some extent reflect inflation which will also apply to future profits, so that it is fine to leave out inflation on both sides. We may just advise that interest charged by the state on inheritance tax debt should be very moderate and likely not contain much else than an inflation component, so that the interest rate doesn’t become a prohibiting factor in company succession by heirs.
Does this mean an heir of a multi-billion company will be indebted for 30 years and be forced to live a simple life until, ultimately, the inheritance tax debt is paid off? So that the real (financial) fruits of the company ownership could only be enjoyed when somebody is already at retirement age? No, not really. First of all, you may inherit shares before you start your working age and already start paying-off your inheritance tax debt early on. Secondly, in a typical family business setting this whole debate is usually focussed on, you would take over a management role in the company that you inherit, e.g. as CEO, CFO, other management or supervisory roles. These roles are usually well-paid. This income cannot only be used for a very decent life despite being “indebted” through inheritance tax; this income can also allow you to pay back your inheritance tax faster than using profit alone.
Lastly, it should be acknowledged that a 100% inheritance tax in the form proposed above may not prevent family succession but substantially reduce it because it is less economically attractive. Taking up a loan, even from the state, and the commitment to earn and pay back a whole company is a burden. However, there is no problem here. We have seen above that heirs can be suboptimal successors and be detrimental to company health. There could be different scenarios for what happens when a family member declines the option to take on inherited company shares. The state (or community) could become a silent shareholder of the company; alternatively, the state could sell the shares to entrepreneurs, other companies or investors.
100% inheritance tax, but not 100% fair?
Some readers may wonder: if despite 100% inheritance tax a generous deferment policy will enable the heirs of even very large companies to “earn back” their ownership within less than a working lifetime and be gifted with lucrative and high-status management positions in these companies, how is this compatible with meritocracy and fairness? Isn’t that just the same lottery of life that 100% inheritance taxes were supposed to cure? After all, if someone from an ordinary family would want to be in the same position, this person would have to convince a bank to grant a considerable loan to be able to buy the company. For an ordinary citizen, no bank will do this. Not even for a very talented, top-educated person. Not unless against prohibitively high-interest rates or securities. So: isn’t this unjust and anti-meritocratic?
The answer is: yes, it is. Such preferential treatment of heirs over non-heirs does not fully match meritocratic and equality of opportunity principles. However, these are not the only goals of our societies, and maybe it is in this remaining yet tremendously reduced privilege that we strike a fair balance between fairness and acknowledging the value of family businesses. This remaining privilege merely prevents family businesses and family-internal succession become an impossibility. It still requires substantial amounts of effort, ability, success and some luck to be able to earn back a company fully. This is fundamentally different from the privilege situation we are coming from and fighting against, where heirs just get all or the largest part of their ownership without any effort and success. 100% inheritance tax with low-interest rates and very long deferment options are thus very close to a fair and meritocratic system while still allowing for the existence of family businesses.
 Kiziltepe and Scholz (2016): “Mythos: ‚ Die Erbschaftsteuer auf Betriebsvermögen gefährdet Arbeitsplätze‘ https://steuermythen.de/mythen/mythos-16/
 German Ministry of Finance (2012): Assessment by the Council of Academic Advisors. https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Ministerium/Geschaeftsbereich/Wissenschaftlicher_Beirat/Gutachten_und_Stellungnahmen/Ausgewaehlte_Texte/02-03-2012-ErbSt-anl.pdf?__blob=publicationFile&v=3
 See for a good overview about the general relationship between inheritance tax and family succession OECD (2021), Inheritance Taxation in OECD Countries, OECD Tax Policy Studies, OECD Publishing, Paris, https://doi.org/10.1787/e2879a7d-en.
 A profit multiple of 10 is very high and rather the upper bound. In many industries and settings, a lower multiple around 6-8 would be more realistic, which only strengthens the argument made here.
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