An inheritance tax is a tax on funds or assets that an individual receives from someone else when the latter dies. Most European countries levy their taxes on bequests from deceased individuals using this type of tax. This is not the only way that a government can tax transfers made from one generation to the next, however. The United States has an estate tax, meaning that the tax assessed by the government is levied on the entire estate before the estate is subdivided among heirs. The difference is more than semantic. Most countries have marginal tax rates that rise as individual income and wealth rise. With an estate tax, a $50,000 estate left to ten heirs will be taxed at the rate that applies for sums of $50,000. With an inheritance tax, each of the ten individuals receiving a share of the estate would be taxed on the $5,000 that they receive. If their marginal tax rate is low, their after-tax proceeds could be much higher than their share of a $50,000 estate that was taxed at a high rate.
In most European and North American societies, policies toward taxing transfers that elders leave their offspring at death have their roots in a pre-industrial, agricultural form of social and economic organization, where land represented the primary form in which wealth was held and social convention dictated that it was important to make sure that a family’s estate remained intact as it was passed from one generation to the next (Delong 2003). As countries modernized, attitudes toward transfers changed, and tax policy evolved simultaneously. For example, the nineteenth century was a period in U.S. history in which the economy was rapidly expanding and land was plentiful. Accordingly, J. Bradford Delong (2003) notes that Americans began to view inherited wealth with suspicion during this period, asserting instead that to be rich one was supposed to have earned his or her riches through thrift and industry. The shift in attitudes helped to create conditions that allowed for the passage of the first estate tax in 1916, and the tax rates actually have been quite high throughout time, indicating that there have been periods in history in which Americans did not view taxing inter-generational transfers as inappropriate or controversial. For example, during the New Deal era the marginal tax rate on large estates was set at 70 percent (p. 50). However, by the 1990s U.S. attitudes had changed and legislation was passed to phase the estate tax down to zero by 2011.
Why is taxing inheritances or estates so controversial? As with any tax there are trade-offs to contemplate when assessing the likely merits of the tax. Opponents argue that the tax makes it difficult to transfer a family business from one generation to the next, although policymakers presumably can prevent this outcome by setting an exemption for “small” estates. A second potential cause for concern exists because economic theory suggests that taxing estates or inheritances might reduce individuals’ propensity to save. If individuals save because of a bequest motive, one expects them to save less during their lifetime if they fear their savings will be taxed by the government rather than being passed on fully to their heirs. However, the ability to receive an inheritance can also distort behavior. Theory suggests that individuals who receive an inheritance have incentives to reduce their work effort. This distortion to a labor-supply decision provides an argument for levying a tax on inheritances or estates.
SEE ALSO Inequality, Wealth; Inheritance; Wealth
Delong, J. Bradford. 2003. A History of Bequests in the United States. In Death and Dollars: The Role of Gifts and Bequests in America, ed. Alicia H. Munnell and Annika Sunden. Washington, DC: Brookings Institution.
Gates, William H., Sr., and Chuck Collins. 2003. Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes. Boston: Beacon.
Pestieau, Pierre. 2003. The Role of Gift and Estate Transfers in the United States and Europe. In Death and Dollars: The Role of Gifts and Bequests in America, ed. Alicia H. Munnell and Annika Sunden. Washington, DC: Brookings Institution.
Vandevelde, Toon. 1997. Inheritance Taxation, Equal Opportunities, and the Desire of Immortality. In Is Inheritance Legitimate? Ethical and Economic Aspects of Wealth Transfers, ed. Guido Erreygers and Toon Vandevelde. New York: Springer.
"Inheritance Tax." International Encyclopedia of the Social Sciences. . Encyclopedia.com. (April 23, 2018). http://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/inheritance-tax
"Inheritance Tax." International Encyclopedia of the Social Sciences. . Retrieved April 23, 2018 from Encyclopedia.com: http://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/inheritance-tax
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inheritance tax, assessment made on the portion of an estate received by an individual; it differs from an estate tax, which is a tax levied on an entire estate before it is distributed to individuals. The inheritance tax is usually progressive and is determined by the amount of property received by the beneficiary, as well as by his or her relationship to the deceased. Strictly speaking, it is a tax on the right to receive the property; the estate tax can be characterized as a tax on the right to transmit the property. All states impose either an estate tax or an inheritance tax, some states employing both. A related federal levy is the gift tax, designed to prevent people from avoiding inheritance and estate taxes by giving away property before death.
In the United States, the federal government levied inheritance taxes during the Civil War period and again during the Spanish-American War; since 1916, however, a progressive estate tax has been imposed. The U.S. tax law of 1981 greatly reduced estate and gift taxes by raising exemptions (from $175,000 to $600,000) and lowering rates, and a 2001 law calls phase out the federal estate tax by 2012; estate taxes in 40 states that are based on the federal tax credit for state estate taxes would be phased out in 2006.
"inheritance tax." The Columbia Encyclopedia, 6th ed.. . Encyclopedia.com. (April 23, 2018). http://www.encyclopedia.com/reference/encyclopedias-almanacs-transcripts-and-maps/inheritance-tax
"inheritance tax." The Columbia Encyclopedia, 6th ed.. . Retrieved April 23, 2018 from Encyclopedia.com: http://www.encyclopedia.com/reference/encyclopedias-almanacs-transcripts-and-maps/inheritance-tax