This is a post is part of my continuing coverage of wealth inequality
Wealth Inequality is one of the largest issues facing societies around the world today, with the consequences being societal unrest and dissolution. The true scale of wealth inequality is almost hard to imagine with disparities growing increasingly large. There are multiple ways scholars/policy makers have suggested to decrease wealth inequality, but I am going to focus on two direct ones: taxing wealth, and taxing inheritance. Wealth taxes, as discussed in the previous post, are direct taxes on the assets on citizens of a country. Inheritance taxes are taxes on the assets of a deceased individual before it passes to the beneficiaries of their will. Both of these taxes lead to the redistribution of wealth through taxation and the means of government spending. However, these taxes have very different advantages and disadvantages when we compare them.
When looking at these two wealth-inequality-fighting taxes there is one clear difference: when they take effect. Wealth taxes take effect usually on a per annum basis with other taxes, and unlike income taxes, it affects all a person’s assets, not just the ones obtained during the year. Inheritance taxes take effect after a person has died, making them a one-time tax on a person’s assets. As a result, wealth taxes (proposed and implemented) must be a lot smaller than inheritance taxes as they have a higher frequency. Reasonably we could expect a 2% per year for a wealth tax, and currently the U.S. has in theory a 40% one-time tax. In practice that 40% one-time tax is closer to a progressive tax starting at 7.7% percent with an effective tax rate of 16.6%. While at 40% the taxes are fairly equal in the amount of wealth taken, at the effective tax rate, the inheritance tax is far far lower of a tax. This makes it both less lucrative for the government, but also more palatable for the citizenry. Relating to palatability, the differences in societal views of the taxes are also important.
Inheritance taxes are termed by some as “death taxes,” referring to the fact that they are applied during the death of a loved one (a trying time in many people’s lives). On the positive side, inheritance taxes are also viewed as more fair than wealth taxes, as an inheritance tax applies to assets that the individuals (heirs) did not earn themselves. Wealth taxes are viewed as harder to administer compared with inheritance taxes as their frequency is so much higher. However, fairly or not, both taxes are viewed as difficult to enforce, and wealth taxes are even viewed as possibly unconstitutional. Overall, as the U.S. does not have an implemented wealth tax it is impossible to fully compare these taxes and their differences.