The head office of the Finnish Tax Administration in Vallila, Helsinki, on 28 December 2024. The Finnish government is considering doing away with the inheritance tax and replacing it with a capital gains tax as a means to spur economic growth, an idea that was met with reservations by economists interviewed by Helsingin Sanomat. (Vesa Moilanen – Lehtikuva)
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ECONOMISTS in Finland are doubtful about the notion of abolishing the inheritance tax and replacing it with a capital gains tax in an attempt to kick-start economic growth, according to Helsingin Sanomat.
The Finnish government is presently mulling over the possibility as a means to kick-start long-sluggish economic growth and promote domestic inheritance.
In Finland, the inheritance tax is levied on inheritances worth at least 20,000 euros. The tax rate is determined in accordance with the inheritance tax table and bracket based on the asset value and the relationship of the inheritor with the deceased, but the tax scheme also has provisions for various types of relief.
Last year, the tax generated roughly one billion euros in revenue, a sum that likely could not be raised with the capital gains tax. Calls for abolishing the tax have emanated, for example, from the Finnish Family Firms Association (PL), drawing support especially from members of the National Coalition.
PL on Tuesday estimated based on its survey that family-owned firms have set aside a total of five billion euros for future inheritance tax payments – a sum that cannot be invested in growing the firm and, consequently, creating jobs and economic growth, noted Minna Vanhala-Harmanen, the CEO of PL.
“Preparing for paying the inheritance or gift tax postpones or prevents investments in 70 per cent of companies,” she said to YLE.
The survey drew responses from the representatives of 200 companies, including 190 of the 563 member companies of PL.
Helsingin Sanomat on Sunday published an article where several economists expressed their reservations about the idea that abolishing the inheritance tax specifically could boost economic growth.
“Economic research does not indicate that economic growth would be slower in countries with an inheritance tax,” said Matti Pohjola, a professor emeritus of economics at Aalto University.
“Unlike consumption and income taxes, taxing inheritances has no impact on prices and incomes determined by the market, and thereby not on the decisions of financial managers. That is why it is better than these taxes to fund public spending. The inheritance tax is also a good means to strive to create a society where everyone has the same possibilities to succeed regardless of their status at birth.”
All taxes can inhibit economic growth and distort economic activity, reminded Tuulia Hakola-Uusitalo, the director general at VATT Institute for Economic Research. The inheritance tax, however, is generally regarded as possibly the least distorting taxegiven that the difficulty of anticipating inheritances means it has a limited impact on business and employment-related decisions.
The interrelationship between the inheritance tax and productivity is complicated, though.
“If financing business operations was a problem or the inheritors had superior business acumen, you could claim that the inheritance tax has an impact on growth. However, research findings do not corroborate these claims – on the contrary. There really is no evidence that removing the inheritance tax would accelerate economic growth,” she wrote to Helsingin Sanomat.
Essi Eerola, an advisor to the board of the Bank of Finland, similarly called attention to the lack of scientific evidence of a connection between economic growth and the inheritance tax. Elements of inheritance tax schemes can have various effects on the behaviour of both the would-be inheritor and the bequeather, including effects that undermine economic growth.
“Also capital gains taxation has problems with disincentives. It can encourage you not to sell a company even though another owner could be better equipped to continue the operations,” she said.
“The Finnish inheritance tax certainly has the problem that the tax depends on what types of assets are passed on and to whom. The inheritance tax often also targets wealth that is not easy to liquidate. The inheritance tax should at least be reformed.”
Scrapping the inheritance tax could promote economic growth if it encouraged investment, remarked Markus Jäntti, a professor of labour economics at Stockholm University. It could also contribute to more effective business operations by doing away with the tax benefits of bequeathing businesses to successors.
“If a company is passed on to successors instead of the people who are best positioned to continue the business operation, it can erode total productivity, according to studies,” he said.
People, he also reminded, may be discouraged from investing in their own mental capital or build up savings because of the looming prospect of an inheritance. “Taxing inheritances gnaws away at this kind of a possible negative incentive,” wrote Jäntti.
Aleksi Teivainen – HT
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Source: www.helsinkitimes.fi
