Marcel Gérard FUCaM , Ucl and CESifo

1. Comment on: “Evaluatie van de hervorming van de schenkingsrechten op roerende goederen in het Vlaams Gewest” by Dr. C. Smolders Marcel Gérard FUCaM, Ucl and CESifo M. GERARD - 2009

2. The Measure • Introduced by the Flemish government it consists in • Decreasing the tax rates on gifts of movables to 3 per cent if to children, parents, grandparents spouses and partners • Decreasing that rate to 7 per cent on gifts to all other beneficiaries • Studied by Carine Smolders and her team in Ghent M. GERARD - 2009

3. Apparently an effective measure since • Gifts at 3%-rate: • Taxincomeincreaseswith 74% (2004-2006) • Number of files increaseswith 135% (2004-2006) • Gifts at 7%-rate: • Taxincomeincreaseswith 32% (2004-2006) • Number of files increaseswith 84% (2004-2006) M. GERARD - 2009

4. A three item research question • Did the reform result in anincrease in the number of gifts, diditchange the timing of gifts, diditchange the average amountgiven? 2. Are there significant differencesconcerning the profile of donors and beneficiariesbefore and after the reform? 3. What do taxpayersknowabout the reform? Are they for oragainst the reform? Did the reform changetheir attitude? M. GERARD - 2009

5. The investigation • Four research exercises • Interviews of experts • Logit analysis of face –to-face interviews with 247 donors or potential donors • Logit and OLS analysis on data from an on-line survey conducted on 1050 potential beneficiaries • Logit and OLS analysis on data collected in 9 register office • Let us leave methodological issues aside M. GERARD - 2009

6. The results (experts) • Clientssooneraware of the benefits of intervivosgifts • Shift in the type of gift: more registeredgifts, lessother types of gifts (hansels) • Significantly more gifts of movables • More transfers accompaniedbyconditions • Wealthyclients are wellinformedabout the reform<>others! M. GERARD - 2009

7. The results (potential / actual donors) • The probability to give is significantly larger in case of women, age 70+, monthly family income >5000 €, 1 or 2 children age 25- 50 jaar, consciously involved in estate planning, altruistic nature • The probability to give is independent of: education, job, tax resistance, knowledge concerning estate planning, health, civil status • The reform is strongly appreciated, but the communication to a much lesser extent • Knowledge of respondents concerning estate planning in general is disappointing M. GERARD - 2009

8. The results (beneficiaries) • Knowledge concerning inheritance taxes and gift taxes = disappointing • Knowledge concerning the reform: 67% never heard of it • The reform is appreciated by a majority of the respondents M. GERARD - 2009

9. The results (deeds) • Larger gifts • Significantly more registered deeds • More conditions attached • Gifts of financial assets increased • Gifts to others increased • Gifts on later moments in life time M. GERARD - 2009

10. General conclusions • Concerning the reform: • Significant increase in tax revenues • Significant increase in the number of registered deeds • Significant increase in conditional deeds • Significant increase in the number of gifts to others • Significant increase of the amount given • Donors still rather old (average> 70) • Registration of gifts is postponed • Gifts increase savings and moderately stimulate investment in real estate M. GERARD - 2009

11. General conclusions 2. Considering the knowledge about inheritance tax • Knowledge in general is very disappointing, except for the wealthy group 3. Appreciation of the reform • Donors and beneficiaries are happy with the reform, but not with the official communication considering the reform • Gift taxes on gifts to partners are contested • A majority of the respondents prefers lower tax rates for the highest tax breaks of the inheritance tax M. GERARD - 2009

12. Elements for a discussion • In the Musgravian tradition a tax reform is to be appraised in line with its effects • In terms of efficiency • In terms of equity • In terms of stabilization and incentiveness • Let us consider the first two aspects only (efficiency and equity) and replace the third one by compliance M. GERARD - 2009

13. Elements for a discussion • Statement: a good tax • Is efficient (less distortions, less externalities / spill over effects) • Is fair (between generations, within generations, between regions) • Is hard to evade M. GERARD - 2009

14. Elements for a discussion • The tax rates have been decreased: is that an incentive for giving up non-compliance and tax evasion? • Has that reform generated gifts at an earlier age in the life, thus an increased transfer from the old to the young generation, at least in discounted terms? • Has that reform produced spill interregional over effects (Canadian case) M. GERARD - 2009

15. Is the reform efficient? • Theoretical economic literature assumes that the government chooses a tax structure that maximizes people’s welfare, taking account of what makes people happy, how their behavior is likely to respond and the need to raise revenue to pay for public services. That suggests that intentional wealth transfers, which presumably benefit the donor as well as the recipient, should be taxed more heavily than accidental transfers, which may not. (…) Taxing accidental transfers does not distort people’s behavior in a costly way. (Boadway et al.) M. GERARD - 2009

16. Is the reform efficient? • Externalities / spill over effects? • Do we observe migration of wealthy taxpayers to the Flemish region? • The Canadian story: Canadian provinces have abolished the inheritance tax since taxpayers migrated accordingly; Quebec was the last due to the language barrier. Might the language barrier be an obstacle to such migration in Belgium so that spill over is little likely to occur? M. GERARD - 2009

17. Is the reform fair? • A better justification for taxing wealth when it is transferred is that this promotes equality of opportunity. On this view an individual should be compensated for disadvantages beyond his control, but not for disadvantages under his control. Therefore, a wealth transfer should be treated as a source of additional opportunity for the recipient that should be taxed, whether or not the donor has already paid income tax or capital gains tax on the assets concerned. (Boadway et al.) M. GERARD - 2009