11 November 2012

Death and taxes

With recent US brouhaha about the 1% (or 0.1%) in mind it is interesting to look at 'The Swedish Inheritance and Gift Taxation, 1885–2004' (Research Institute of Industrial Economics Working Paper No. 936, 2012) by Gunnar Du Rietz, Magnus Henrekson & Daniel Waldenström which follows the money in a study of the evolution of the modern Swedish inheritance taxation from introduction in 1885 to abolition in 2004.
A thorough description is offered of the basic principles of the tax, including underlying ideas and ambitions, tax schedules, and rules concerning valuation of assets, liability matters and deduction opportunities. Using these rules, we calculate inheritance tax rates for the whole period for a number of differently endowed family firms and individuals. The overall trend in inheritance tax burden exhibits an inverse-U shape for all firms and individuals. Up until World War II, inheritance tax rates were very low (never above six percent), but in the postwar era tax rates increased rapidly for both inherited firms and individual fortunes. Effective tax rates peaked in the mid-1970s. Valuation reliefs were introduced in the 1970s, which sharply reduced tax rates for inherited family businesses. Tax rates for deceased individuals were first cut in 1987 and then significantly reduced in 1991–1992. Finally, inheritance and gift tax revenues were relatively small, around a quarter of a percent of GDP. 
The authors conclude
In this paper we have analyzed gift, inheritance and estate taxes in Sweden. The analysis begins in 1885 when (a modern form of) inheritance taxation was first introduced in Sweden. In the 1910s, a formal gift tax was launched and during the period 1948–1958 there was also an estate tax in addition to the inheritance and gift taxes. The analysis stops in 2004 when the Swedish inheritance and gift taxation is abolished.
The inheritance tax was introduced in 1885 as a single tax – the 1884 stamp ordinance – with the estate report as the tax base. The first modern inheritance tax was introduced in the form of the 1894 stamp ordinance. It increased the maximum tax rate for spouses and children to 1.5 percent of taxable lots and to 6 percent for other heirs. The 1914 inheritance and gift tax ordinance – introduced in 1915 – integrated the two taxes and was also the first modern gift tax. It had a maximum marginal tax rate of 4.5 percent for spouses and descendants, and 18 percent for other non-legal heirs. After 1911, sizeable tax increases were implemented on two occasions.
The first substantial tax hike took place in 1934. In 1933, the government proposed a new high state tax on inheritances and gifts. This bill was, however, rejected by Parliament. After having failed to introduce an estate tax, the new Social-Democratic minority government instead substantially raised the taxes on gifts and on inheritance lots (arvslottsskatten). The maximum rate for children and spouses was raised from 4 to 20 percent and the maximum rate for others (Tax Class IV) from 18 to 35 percent.
The second drastic tax increase occurred in 1948 when a new and more successful attempt was made to introduce an estate tax – the 1947 estate tax ordinance. The new, high estate tax was imposed side by side with the earlier taxes on gifts and inheritance lots, but the estate tax was made deductible before the inheritance tax was calculated. The maximum marginal tax rate (the net sum of inheritance and estate taxes) for descendants and spouses was raised in 1948 from 20 to 60 percent and for others from 35 to 67.5 percent.
The marginal inheritance tax rate peaked in 1971–1973 at 65 percent for descendants and 72 percent for other family members. During the period 1948–1973, the average inheritance tax for wealthy persons and owners of large closely held corporations exceeded 48 percent.
Owing to the introduction of a tax relief for small firms in 1971, and a reduced valuation of business capital in 1974, the inheritance tax burden already peaked in 1973 for smaller family firms. In 1978, the valuation of business capital (defined as company net worth) was reduced to 30 percent of book value. Even though this caused the tax burden for family firms to drop, the high and progressive inheritance tax continued to make it difficult to transfer firms to family successors, and even for larger family firms to continue as independent entities. For large individual estates, the inheritance tax continued to be around 40–50 percent of the estate through 1991. A substantial reduction of tax rates was implemented in 1992, and then the tax on bequests to spouses was removed in 2003 followed by the final abolishment of the entire inheritance and gift tax in December 2004.
Inheritance and gift tax revenues were never particularly important as a source of revenue for the central government; with few exceptions less than two percent of total tax revenue was raised this way, and in the last forty years before abolishment the share was around one tenth of that level. Instead, these taxes were primarily motivated by distributional concerns, relating to an urge to even out large inequalities of opportunity arising from inherited wealth at the top of the wealth distribution. Society apparently accepted paying a price in terms of excess burden to secure a more even distribution of opportunity, but the low revenue from this source in the postwar period casts doubt on the effectiveness of the inheritance and gift tax in this regard.
Exactly what factors that can explain the removal of the inheritance tax in 2004 have not been analyzed systematically by researchers. According to Lodin (2009), the tax was abolished as part of a logrolling scheme between the Social Democrats and the Left Party, but whether there were other, more structural, determinants related to taxpayers’ avoidance or to the public opinion remains to be established by future research.