What is inheritance? Should inheritance be taxed? And if so, at what level?
Today I want to talk about wealth, inequality, and whether or not we should change our system of inheritance in the future!
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Vocabulary
- Inheritance (Noun): Property, money, or assets received from someone who has died.
- She inherited a large inheritance from her wealthy grandfather.
- Progressive Tax (Noun): A tax system in which the rate of tax increases as income or inheritance increases.
- Many countries implement progressive taxes to redistribute wealth.
- Wealth (Noun): The amount of valuable possessions or money owned by an individual, family, or society.
- The family’s wealth allowed them to live a luxurious lifestyle.
- Asset (Noun): A useful or valuable thing or person.
- Investing in stocks can be a valuable asset for building wealth.
- Estate (Noun): All the money and property owned by a particular person, especially at death.
- The businessman’s estate was divided among his children after his passing.
- Meritocracy (Noun): A system in which advancement or success is based on ability or achievement rather than on factors such as age, race, or class.
- In a meritocracy, individuals are rewarded based on their talents and efforts.
- Inequality (Noun): Difference in size, degree, circumstances, etc.
- The widening inequality gap has become a pressing issue in society.
The Richest Generation in History?
Millennials, the generation of people born between the early 1980s and late 1990s, are apparently on course to become the richest generation of people in history. At least this is according to a recent report released in the United Kingdom.
This might surprise many of you listening. Wages are stagnating in many countries, the cost of living is increasing, inflation is cutting away at people’s savings, and it is very expensive to buy houses!
A lot of people assume that millennials will struggle to be as successful and as wealthy as their parent’s generation.
Well, this is not untrue.
It is harder for millennials and younger people to build wealth in many cases. However, some people will become wealthy thanks to inheritance.
Millennials will become the richest generation in history due to a massive transfer of wealth that is going to take place in the next 20 years. Older generations will begin to hand down their wealth to their children and grandchildren, making those children and grandchildren wealthier.
While millennials will become the richest generation on average, this massive transfer of wealth will not happen to everyone. The wealth will go to people with rich parents and families.
It is a sad reality, but for many younger people the ability to buy a house or prepare for the future or be successful will be based on their background: whether their parents are rich or not rich.
I believe that the hardest working people, the people with the most talent and ability, should have the opportunity to become successful.
I know people who have worked incredibly hard from school, to university, to finding a job. They got the best marks, have found excellent careers, and are doing amazing things. They should be the most successful people I know.
However, I know some people who didn’t do any of that, but due to wealthy families and inheritance have been able to buy houses or apartments and live a much more comfortable life.
Rather than skill, talent, or hard work, often success depends on how rich your family is. At least in my opinion. And this is only going to become more obvious in the next years as young people struggle to gain wealth unless it is through inheritance.
I’m sure many of you will understand and maybe even agree with this point. However, when it comes to discussions about what to about this problem, this issue is a lot more controversial and complicated.
Maybe you agree it is unfair that people with rich families are usually the most successful people. But would you still agree if I suggested we introduce a 100% inheritance tax so that children can’t benefit from their parents’ wealth?
Most of you would say no! You are working hard for your family and children’s futures.
Today, I’d like to explore inheritance in more detail. I want to look at how inheritance works in most countries, and then look at the arguments around the extreme ends of inheritance: 100% tax and 0% tax!
What is Inheritance and Inheritance Tax?
Inheritance is the passing down of property, wealth, and rights from one generation to another. This concept dates back thousands of years and has been a found in many different cultures.
In ancient civilizations such as Mesopotamia, Egypt, Greece, and Rome, inheritance laws and customs were different but often involved the transfer of land, livestock, and other assets to heirs.
In medieval Europe, inheritance practices were heavily influenced by feudalism and had a system where the eldest son inherited most of a family’s wealth and titles, leaving younger siblings with less or nothing.
Feudalism basically meant that all property was owned by a person, usually the king, and other people were allowed to use that property. When they died, their family would be allowed to keep the property as long as they paid the taxes to the king.
The idea of taxing inheritances has also been present throughout history. One early example is the “death tax” imposed by ancient Egypt’s pharaohs, which required the deceased’s family to pay a portion of their wealth to the Pharaoh when they died. Egypt, for example, apparently had a ten percent tax on inheritance nearly 3000 years ago,
In modern times, inheritance taxes became more widespread as countries developed systems of taxation to finance government operations and social programs. The United Kingdom introduced one of the first modern inheritance tax systems in the late 17th century, and other countries followed.
In the United States, the federal government implemented estate taxes as early as 1797, though they were only occasionally enforced until the 20th century. Often these taxes were introduced in times of war to fund the army.
Originally, most inheritance taxes would only apply to the very wealthy. Most countries have an inheritance tax exemption – meaning you don’t need to pay any tax on the amount below that exemption number.
In the USA, for example, the 1916 tax laws had an inheritance exemption of $50,000 which is about $11 million in today’s money. Only the incredibly wealthy would own more than that.
Today, exemptions still exist but are often lower. In the UK, for example, the exemption is £325,000. The average house in England is worth about £300,000 this year – so if a person with some savings, a house, and other assets dies, it is very likely their family will need to pay some inheritance tax.
The idea behind inheritance taxes has varied but often includes principles of wealth redistribution, raising money for public services, and addressing wealth inequality.
Today, many countries have inheritance or estate taxes, although the specific rules of these taxes can be very different. Some places have abolished inheritance taxes altogether, while others have progressive tax systems with different rates and exemptions based on factors such as the value of the estate and the relationship between the deceased and the heir.
Should Inheritance Tax be Abolished?
Countries With No Inheritance Tax
As I just mentioned, some countries have no inheritance taxes at all.
For example, the tiny independent state of Monaco does not tax inheritances and has attracted many wealthy families and individuals for this reason. Monaco has become a home to elite and luxury services, including financial services, real estate, and casinos, due to the wealthy residents of the country.
Several countries in the Gulf region, including Saudi Arabia, the UAE, Qatar, and Kuwait also have no inheritance taxes. Again, this has made these regions attractive to wealthy individuals and foreign investment. Gulf countries tend to fund their governments through other forms of taxation or directly from oil exports.
Some small Caribbean islands also don’t have inheritance taxes, and again these islands attract wealthy individuals and families.
Arguments for 0% Inheritance Tax
People who argue in favour of completely abolishing inheritance tax often argue about individual freedom and property rights.
Inheritance allows families to pass down wealth and assets to future generations. It allows parents to help their children maintain the standard of living that they have been used to!
If a wealthy family knows that they can leave 100% of their assets, money, and properties to their families when they die, it can encourage these families to invest their money in the economy.
If the government is going to tax a high percentage of wealth, the family might decide to spend all their money before they die… but if they can pass it down, they would likely save more or invest more in the stock market, helping the overall economy grow.
Advocates of low or zero percent inheritance taxes also point out that often inheritance tax is a form of double taxation. You earn money in your life; this is taxed by the government, and you use the rest for your life and savings. When you die, the remaining money is taxed again!
0% inheritance taxes can be particularly beneficial for family-owned businesses, as it allows them to be passed down intact to the next generation!
Arguments for Progressive Inheritance Taxes
However, I don’t personally think inheritance tax should be 0 percent. The vast majority of countries tax inheritance, usually at a progressive rate.
This means you don’t need to pay taxes on the first portion of money, and then the rest is taxed at different levels.
Japan, for example, has one of the highest possible inheritance tax rates in the world at 55%. However, this rate is progressive – it doesn’t apply to the vast majority of people.
In fact, data shows that 90% of cases in Japan don’t require any inheritance tax to be paid, and only 1% of people paying inheritance tax pay above 25%. So, in other words, 0.1% of cases in Japan have a person paying more than 25% (let alone the top rate of 55%).
Progressive systems mean that the majority of people will pay only a small amount of inheritance tax, if any, while the ultra-rich will be taxed more.
By imposing higher tax rates on larger inheritances, these taxes can help reduce the amount of wealth held by a small elite group of people, and also promote a fairer distribution of resources. Ideally, wealth will flow more freely within society and allow people to succeed for themselves!
The revenue generated from progressive inheritance taxes can also be used to fund public services.
Should Inheritance Tax be 100%?
What if we wanted to be more radical?
I’ve looked at the arguments for no inheritance tax and progressive inheritance taxes. What would happen, however, if we had 100% taxes? What would happen if there was no inheritance at all?
Well, a 100% inheritance tax would mean that everyone starts on a level playing field, regardless of the wealth of their parents. A person from a rich family and a person from a poor family will inherit the same amount… zero.
Actually, there are other things other than assets that rich families give their children – including opportunities, education, and life experiences. So, there will not be a completely level playing field, but no inheritance will make people much more equal.
If the system works well, inheritance can be used to redistribute wealth. We can take wealth from the rich and spread it fairly around society. The revenue generated from a 100% inheritance tax can be used to fund essential public services, infrastructure, education, healthcare, and social welfare programs that benefit society as a whole.
This inheritance tax would encourage a true meritocracy where individuals are rewarded based on their own efforts, talents, and contributions to society, rather than on the circumstances of their birth.
It would also prevent family dynasties, were a small number of families keep control over certain land or resources for generations.
Final Thought
What do you think?
After listening to this episode, what is your opinion? Do you think inheritance taxes are a good thing or a bad thing?
Should there be no inheritance tax? Are progressive taxes the best system? Or should we tax inheritance at 100%?
Let me know in the comments!
What do you think?
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