Abolishing gift- and inheritance tax in the name of equality
March 27, 2018
Equality is a fundamental principle of taxation. Taxation must be carried out in such a way that the tax burden is imposed equally on all taxation subjects. The progressive tax, which imposes a higher rate of taxation upon individuals with large incomes than on those with small incomes, is an attempt to achieve this objective.
The basic idea behind inheritance- and gift tax is that a person transfers property to another person while receiving nothing, or less than full value, in return. Consequently, the receiving persons' assets has increased and therefore is eligible to pay a portion in taxes. The set up is logical, but the problem is that in most cases gifts and inheritance do not consist of liquid assets.
A normal estate in Finland consist of an apartment, shares and real estate. Parents and grandparents donate shares and real estate to their children and grandchildren. In many cases the person accepting the inheritance is forced to take out a loan, or even sell the property in order to pay the taxes. I have come across family businesses that have struggled to survive the inheritance tax, especially if death has been sudden and plans for the next generation to take over have not been in place.
When lecturing on estate planning, I also bring up the most aggressive way to plan - moving from Finland. My audience used to laugh at this option a couple of years ago - as if it was a joke. But after wealthy families have moved in order to avoid paying gift- and inheritance tax - and even publicly giving taxation as one of the reasons for moving - no one is laughing any more. These moves have been lively debated in media, from a moral point of view. This takes us to the other problem with gift- and inheritance tax. By moving you can legally avoid paying.
It is a fact that gift- and inheritance tax is a form of tax that more and more countries abolish. Finland is one of the few Scandinavian countries that still has gift- and inheritance tax. In other countries an individual pays transfer or capital gains tax when selling property. At this point the person actually has received liquid assets and can pay the tax without having to take out a loan. This is the primary basis and form of taxation used internationally.
Moving to another country is not a big deal anymore. Many wealthy families have properties in more than one country, and moving to a warmer climate when reaching a certain age has become quite common. Countries like Portugal and Spain attracts individuals from other countries with their low taxes. Individuals living in an international relationship might also give some thought to taxation issues when deciding where to reside.
Naturally a person that has more, needs to pay more. However it seems to be a common misconception that Finland looses a lot of tax money if abolishing gift- and inheritance tax. According to my former boss, tax professor Janne Juusela, abolishing gift- and inheritance tax broadens the basis for transfer and capital gains tax and makes up for the loss this way.
The citizens' initiative on abolishing gift- and inheritance tax reached the required 50 000 signatures last week. This means that the Parliament is obliged to take the citizens' initiative up for consideration. However, having followed the political discussions, I do not expect the sitting government to abolish the gift- and inheritance tax. I think we will have to wait another five-ten years.
One can argue that this disputed tax is not based on the principle of equality - and the ones loosing out is in fact normal folk with no extra liquid assets or houses in Spain. But is it so easy just to pack up your things and move? When is one no longer a tax subject in Finland? This is the topic for my next blog post - next week.