Inheritance Taxation, Corporate Succession and Sustainability

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Inheritance and estate tax rates are highly heterogeneous across countries. Indeed, the lack of a broadly accepted model of optimal inheritance taxation is reflected in statutory tax rates ranging from 0% in several countries including Australia, Canada and Sweden to 55% in Japan. In addition, tax expenditures (TEs) through reduced rates, exemptions, and deductions in the context of inheritance taxes are significant, and hence exacerbate the variation in effective tax rates. Moreover, these schemes are often costly, opaque, and raise several concerns with regard to their effectiveness as well as efficiency in reaching their stated goals.

Inheritance TEs relating to the transfer of family businesses are a case in point. Taxes on inheritance can create liquidity constraints for heirs that force them to sell parts or all of the business. In this context, many countries have introduced tax privileges to lower inheritance tax liability for the transfer of family businesses. At the same time, neither the theory nor empirical evidence substantiate the underlying assumption that keeping family businesses within the family enhances welfare. In addition, several observers argue that liquidity constraints as a result of inheritance taxation may be less of an issue for most businesses than commonly assumed.

Against this background, the goal of this discussion note is threefold: i) to provide an overview on inheritance taxation across OECD countries; ii) to discuss its interconnections with family business succession and; iii) to introduce the reader to specific TEs for inheritance taxation, and to assess their alignment with a broad sustainability agenda, in particular with regard to job creation and social mobility, as well as their effectiveness and efficiency.