Does an inheritance tax make sense? And would we have to fundamentally restructure our tax system if we could? A conversation with economist Monika Bütler.
“Inherited wealth is often lost more quickly than expected”: Monika Bütler, economist, member of several foundation and administrative boards and honorary professor at the University of St. Gallen.
Gaëtan Bally / Keystone
Ms. Bütler, we are sitting in your garden in the middle of the city of Zurich – is it still possible to create a garden like this these days or can you only inherit it?
The garden is not the problem, it’s the house! We bought it sixteen years ago without an inheritance, then a few tough years followed. My husband and I worked full time, the children were small, and the mortgage on the house was large. I still see people buying their own homes without an inheritance – in the city of Zurich it has become almost impossible. But the home ownership rate in Switzerland has always been low, and even lower when I was a child than it is today. For my parents, owning their own house in the country was an unattainable dream even back then.
Is inheritance fair?
It’s a question of perspective. I have a friend whose parents made a small fortune with a business. The children could therefore afford to work less. During a discussion about how the state should finance a certain task, she said at some point: “We should simply increase taxes . . .” And I said: “With inheritance tax!?” She exploded: “That’s theft, that’s unfair!”
In the end it comes down to how you define ownership?
Yes. The debate about whether inheritance is fair has been going on for a long time. Just like the discussion about the economic impact of an inheritance tax. An interesting debate is coming from the USA. On the one hand, the guarantee of property was always central – at the same time, it was believed that the dynastic European society was leading to ruin. For a long time, the USA had a very high inheritance tax. A distinction was made between self-earned, so-called good wealth and unearned, less good wealth. The question is whether the guarantee of property does not also include the ability to decide for yourself what happens to your assets after death.
Literature is full of unfortunate heirs. We don’t seem to trust unearned money.
Inherited wealth often disappears more quickly than expected – because of inheritance divisions, because of taxation, because the heirs are not as successful as their ancestors or because they adapt their behavior and work less, for example. This is also referred to as the third-generation curse. Inheritances that go over several generations are usually tied to a family company and to a mechanism to keep the wealth together.
Are we passing on inheritance in a good way? At the moment, old pensioners are passing on inheritance to young pensioners.
The inheritance is transferred at this point, but it has an impact much earlier. The heirs in my circle had already bought their house or reduced their workload before they inherited. They knew that we would have to save less for our old age, and that we could get a guarantee or a loan from our parents if necessary. That leaves an impression.
You behave like an heir before you actually are one? This is how the gap between heirs and non-heirs widens.
Yes, that’s why the USA had a high inheritance tax: to increase equality of opportunity. However, money is only one dimension of inheritance. The economist Milton Friedman said: Innate intelligence, family situation, appearance – none of these dimensions are taxed. He asked: Why should we only tax wealth? I find this argument against an inheritance tax a bit far-fetched.
With money you can compensate for other dimensions.
Certainly. But in countries like Switzerland, you don’t need a fortune to have a good start. I would say that our children didn’t have a good start because of the money – when they were little, we still had to struggle financially – but because they have a stimulating environment, because they are healthy. That cannot be offset by taxes.
Economist Thomas Piketty suggests that everyone should receive an inheritance of 120,000 euros at the age of 25 – this would create equal opportunities.
Piketty’s idea is compelling, but at 25 the money comes too late. If it comes at all, it would have to be paid out before university and further education and could only be spent on certain things. Good schools, especially primary schools, and access to good pre-school care are much more effective in creating equal opportunities than redistribution at a later date.
The Juso are not the first to call for a national inheritance tax. The discussion comes up regularly, but the rejection has always been strong: the last time an inheritance tax clearly failed was in 2015.
The idea that you still owe the state something when you die is repugnant to many people. They feel that they have already paid enough taxes on the wealth they have earned: first income tax, then wealth tax, and capital gains tax is payable on certain types of income. Having to pay wealth tax again when you die – and inheritance tax is nothing other than that – feels unfair.
But wouldn’t it be fairer to tax inheritance rather than performance?
Inheritance tax also affects those who have made a contribution, but only after death.
Okay, but why is performance taxed so heavily?
With income tax: because it is easy to measure. Ultimately, performance is always taxed, sometimes later and not always for the right person. Actually, it is not performance that should be taxed, but performance capability – your potential, how much you could do. Leisure time is also part of performance capability, but is not taxed. Taxes also influence people’s behavior, including inheritance tax: if performance is taxed at death, this can be an incentive to do less beforehand and consume more.
If you could rebuild our tax system, what would it look like?
I am not a fan of greenfield strategies. Taxes or transfer payments depend heavily on the values of a society that have grown. The tax system should certainly be as simple and transparent as possible. Performance should be well reflected in tax revenues. And it is better if the broadest possible base is taxed, but not too highly.
Are there countries that do things completely differently than we do?
The cultural peculiarities are particularly evident in inheritance tax: the Nordic countries have no inheritance tax, although they have a high concentration of wealth, in some cases higher than in Switzerland or America. This concentration of wealth is offset by a very generous welfare state. In many poorer countries, the state is not trustworthy enough to be able to collect taxes at all. Low taxes are therefore often the result of a dysfunctional state.
At the moment, the Swiss state is short of money – then the creative phase begins in terms of taxation. The first reflex, most recently when it came to financing the 13th AHV pension, is often to increase VAT. Is that right?
VAT makes sense when it is embedded in a progressive tax system. It covers all social classes, but tends to affect lower earners more than high earners. In Switzerland, the direct federal tax is very progressive – and together with the value added tax, which is also levied by the federal government, this makes sense. The reflex of constantly increasing VAT is tricky, however. Here, where it is low, it is not worth evading VAT. On the other hand, if you have a restaurant, like in Greece, and have to hand over 24 percent of the revenue to the state, I understand anyone who occasionally collects cash behind the scenes.
Why, as with VAT, do even the poorest people have to pay taxes?
There is an argument that everyone should contribute to the costs of the state. In Switzerland, this happens via value added tax. My two youngest children also pay their 24 francs poll tax – I think that’s a good thing. In addition, a tax base that is as broad as possible means that tax rates are lower and therefore there is less tax evasion – or avoidance by working less, for example.
In other words: Switzerland is not far from the ideal tax system?
Yes, I think it is pretty well balanced. A system with wealth, income, capital gains and light inheritance taxes, which we already have in many cantons, is pretty intelligent.
To what extent must one of the goals of tax policy be to reduce inequality?
Tax policy always involves income and expenditure. You can have a super-progressive tax system, but if you then give the money back to the rich, you have achieved nothing. Switzerland stands out in international comparison: we have much less inequality in income before redistribution than other countries and therefore need to redistribute less through taxes to achieve equal distribution. That is ideal.
Which tax is most often cheated?
Probably with wealth tax – because wealth can be easily shifted. Shifting is also a way to optimize taxes. For example, with the self-employed: if income tax is increased, less is paid out as wages and more as capital. And vice versa.
Think about it personally: How can I pass on my garden, my house without having to pay a lot of taxes on it?
No.
Really?
I’m not rich enough for that. I just want to be independent and not get into financial difficulties when I’m older. That’s why I’m very careful with my financial planning. I’ll probably leave something behind – but not because I’m saving for my children’s inheritance. I’m not really worried about it.
