Tax On Capital & Savings Part B Flashcards
What tax do the US use for inheritance
Estate tax:
40% on estates above $5.5m
but charitable and spousal giving is fully exempt e.g bill gates could give all wealth tax free to charity (hence why rich have charities….)
Estate tax only affects the richest! But people do not know this.
How many people /1000 wealthy enough to face this tax
1/1000
Welfare effects of inheritances (argument for and against taxing inheritance)
Contributes to inequality - so seems fair to redistribute from those who received inheritances to those who did not
however, unfair to tax parents who worked hard to pass down the wealth to their children
Behavoiural responses of inheritance tax
Reduced wealth accumulation of altruistic parents
reduces labour supply of altruistic parents (less incentive if cannot pass down to kids)
induces inheritors (kids) to work more through income effects (receive smaller inheritance)
4 models of bequests:
accidental
altruistic bequests
manipulative bequest motive
social-family pressure bequests
Accidental bequests
People die with a stock of wealth they intended to spend on themselves (do not plan to leave leftover wealth - may die unexpectedly)
Would inheritance tax have a distortionary effect on behaviour of parent?
b) what about inheritor behaciour
no, as werent planning to leave bequest wealth anyway.
b) tax increases labour supply of inheritors through income effects thus case to tax bequest heavily to get this repsonse!
How many people say the main reason they accumulate wealth is for bequests to their children
only 1/3.
Altruisitic bequests
They get utility from leaving money for children. the more money they leave for children, the more utility they get
Altruistic bequests expressions
they leave b left
inheritors receive b received
Why does Atkinson-Stiglitz break down with altruistic bequests
Because AS assumes differences in earnings comes down to only worker, whereas now its working and inheritance!
manipulative bequests
Use potential bequests to extract favours from children
What does Bernheim-Shleifer-Summers find on manipulative bequests
Number of visits of children to parents is correlated with bequeathable wealth
Social-family pressure bequests
Parents may not want to leave bequests but feel compelled to by pressure of society
Social family pressure:
With estate tax, how do parents feel?
They feel they do not need to give as much (they are made better-off by estate tax) so case for estate tax stronger
Empirical evidence
Why do stats’s underestimate net foreign asset positions
Because they hold in off-share tax havens e.g US individual opening Cayman Islands account and buy US stock but this is not reported in US, only Cayman Islands
How much of global wealth is in tax havens
8% - a lot!
6% is unrecorded
How to curb off-shore tax evasion
Exchange of information across countries - but requires all countries cooperation!
What has been done, and has it been effective?
G20 countries have forced some tax havens to sign treaties on bank info sharing
Not that effective - Tax evaders responded by shifting deposits to havens not in the treaty (hence why ALL COUNTRIES COOPERATION NEEDED)
FATCA ‘13
Try to impose information exchange for all entities dealing with US
E.g if foreign bank doesn’t provide list of its all US account holders, any transaction between them and US has 30% tax
Long term solution for off-shore tax evasion requires
Systematic registration of assets to ultimate owners
Systematic information exchange between tax countries with no exceptions for tax havens
How could this be enforce/how to increase compliance
With tariff threats on tax heavens e.g if they do not provide list of US holders, US can impose a tariff imposed on importing US goods
Government debt
Increased since COVID
Framework to assess debt reduction pg18
𝑑𝑡 − 𝑑𝑡-₁ = [𝑟𝑡− 𝑔𝑡/1+𝑔𝑡]𝑑𝑡-₁ − 𝑝𝑏𝑡
How to control debt (3)
Strong economic growth (gt>rt) to reduce debt-to-gdp ratio
Inflation
Fiscal consolidation (decrease deficit with wealth tax mainly)
Strong economic growth is gt>rt
Why may periods of g>r not be long
As countries with larger debt likely have higher interest rates, so increased r and reduced g!
Inflation - when can it be useful to reduce debt
If unexpected and raises g faster than r
(Prices increase, wages increases, tax revenue increases so they can spend more! Meanwhile r is slower as set by central bank etc)
Caveats to inflation reducing debt
Would take a major increase in inflation to make a significant reduciton in todays debt-to-GDP ratio
Subsequeant disinflation would be needed to return to normal stable level, which would be costly
If inflation is expected, ineffective
Fiscal consolidation: why wealth tax?
Expenditure cuts eval; harm growth
More taxes; harm growth
So wealth tax!
Why wealth tax
Large debt means large creation of private wealth (since gov borrow from private and pay interest to them)
so suitable to ask private wealth to contribute to repaying debt after crisis
Why time limited?
Less likely to harm growth - tax past accumulation but returns to current investment are unaffected
So sounds good but why do only 3 EU countries use them
difficulties measuring wealth
imposing a wealth tax reduces amount of taxed wealth
high admin costs
Imposing a wealth tax reduces amount of taxed wealth due to…
efficiency costs
capital flight (tax evasion)
A tax that can be costlessly evaded with no disincentives for real behaviour
who bears burden on wealth tax
if wealth tax reduces capital accumulatiom, in long run it can reduce average wages and harm workers
Overall what is better
a one time tax on existing wealth - as avoids efficiency costs and behavioural responses since it taxes wealth that already been accumulated
eval: relies on ability of policymakers to implement tax on short notice/surpise. if people are aware, they’ll move their wealth before it is taxed
Wealth attitude
public attitude want wealth to be taxed more
