Are Inheritance Taxes Special?

Luc Arrondel & André Masson, Taxing more (large) family bequests: why, when, where?, (2013), available at HAL-SHS.

As I write this review, I am blatantly aware of the maxim “we like what we know.” I like Luc Arrondel and André Masson’s (A&M) working paper (lots) because it touches on themes I have previously written about (the clash between family autonomy and equality of opportunity as the central normative tension underlying the federal wealth transfer taxes) or enjoyed in other legal scholars’ work (the failure of economic models to account for “life in all of its fullness”). The contribution to these subjects made by A&M is interesting for two reasons: 1) they are economists by trade and 2) they offer a distinctly interdisciplinary analysis of the conundrum of wealth transfer taxation.

A&M first identify (and empirically document) a tax “puzzle:” revenues from wealth transfer taxation are very low and have fallen as a percentage of GDP in most developed countries over the past 50 years; whereas, revenues from lifetime capital taxation (including taxes on property/wealth and taxes on annual capital income flows) are generally higher and show no decreasing trend. The article discards several proffered explanations for this phenomenon (increased lobbying by the rich, growing international tax competition, and the relatively recent anti-government/tax movement) because these factors, intended to account for the growing unpopularity of inheritance taxation, would also imply—wrongly—a sharp decline in lifetime capital taxation.

A&M find some traction in a more recent theory offered by two other economists, Piketty and Saez (P&S), who specifically address the optimal mix between “one-off” inheritance taxation and lifetime capital taxation.1 Under the basic P&S model, if capital markets are perfect and riskless, then the two types of taxes are equivalent. However, when capital and insurance market imperfections (including random, uninsurable shocks to rates of return) are introduced, the model favors lifetime capital taxation because it can provide insurance against return risk more powerfully than bequest taxation. A&M concede that this theory might be able to explain a preference for lifetime capital taxation over inheritance taxation but argue that it fails to account for the diverging trends in the two taxes over time.

According to A&M, “reform” economists do not really understand the growing unpopularity of bequest taxation because they “are so concerned with destroying the widespread view in academic circles of zero capital taxation that they have come, more or less willingly, to overlook the specific issue of inheritance taxation.” Economists conceptualize wealth transfer taxes as involving the same equity/efficiency trade-off as other taxes. This view fails to account for the distinct character of inheritance taxation where family values, intergenerational links, and relationship to (one’s own) death play a crucial role.

A&M articulate the particular problem of wealth transfer taxation as a conflict between two incommensurable principles: family values and social justice considerations (including equality of opportunity). The former principle argues against inheritance taxation, whereas the latter value favors high bequest taxes. The growing aversion to wealth transfer taxation, which does not affect other forms of capital taxation, could then be due to an increased emphasis on the family, a weaker collective sense of social justice, or both. Relying on the work of sociologist Jens Beckert, A&M attribute much of the growing unpopularity of wealth transfer taxation primarily to an evolving view of the family as “a safe haven against growing insecurity and declining economic growth: it reflects waning trust in capital markets, the Welfare state, returns to education, and possibilities for upward social mobility.”

A&M suggest that reforms to bequest taxation should be viewed (and evaluated) as a means to “reconcile the two antagonistic principles.” They dismiss two reforms (substituting higher lifetime capital taxation for bequest taxation and including all wealth transfers in the income tax base) as insufficiently addressing the family vs. society dilemma. On the other hand, the authors view favorably a system that taxed inherited bequests more stringently than self-accumulated bequests (first proposed by Rignano), but recognize the virtual impossibility of its implementation.

In the last part of the article, A&M offer their preferred reform coined “Taxfinh” (tax (much) more (large) family inheritances). While spelled out in only the most general terms, the idea seems to be to levy a heavy tariff on transfers at death while exempting (or substantially reducing the burden on) lifetime transfers (to either family or charity). According to A&M “it is the only workable measure that endeavors to reconcile arguments of family values with principles of social justice, while also taking due consideration of the sharp increase in life expectancy in most developed countries.” While much of the Taxfinh discussion is particular to France, A&M offer U.S. audiences a surprisingly rich analysis of the familial, existential and societal interests implicated by wealth transfer taxation and a candid assessment of their own discipline’s failure to capture these aspects of the tax.



  1. Thomas Piketty & Emmanuel Saez, A Theory of Optimal Capital Taxation (Nat’l Bureau of Econ. Research, Working Paper No. 17989, 2012). []