I had a brief discussion the other day about the pros and cons of inheritance tax. I tried to explain the difference between investment and consumption and what that difference has to do with the effects on a high inheritance tax burden.
Because we are at the beginning of a broad discussion on who has to pay for the effects of the corona crisis (Werner Kogler, party leader of the Greens in Austria, for example, wants to tax successors), I post my answer.
I would like to explain it with the help of an example. Assume the whole economy is nothing but a pizza restaurant. There is the owner on the one hand, who started his business. He bought chairs, tables, an oven. He thought about the menu, tested new recipes, built a website. That all took him time and money in the hope of financial rewards in the future. He is an investor. On the other hand, there are his guests. They go to the pizzeria, they consume. The consumption of the guests is the return on his investment as the owner of the restaurant.
Back to the inheritance tax. A high tax burden leads to the incentive to avoid that burden. There are two ways to do that. One is to transfer wealth before you die. The second is to spend all your money, so that there is nothing to tax in the end, which is, to take the example, having pizza each day, all day long (because there is nothing else in the economy). The problem is this, generally speaking: If all goes into consumption there is no investment. There won‘t be better services, no new recipes, not a better oven, not a second restaurant.
So there are two findings:
1) Normally a high tax burden does not lead to higher tax revenue but to modified behavior.
2) The introduction of a high inheritance tax would lead to more consumption which could lower the wealth of society because investment (starting a pizza business) is the basis of wealth (having pizza, having money by selling pizza).