Swiss Reject Proposed Federal Inheritance Tax

A Swiss ballot initiative proposing a federal inheritance tax was roundly rejected yesterday, with 71 percent of voters opposing the measure. The proposed inheritance tax, which is a type of tax similar to the U.S. federal estate tax, would have imposed a 20 percent tax on all estates left directly to children.

Switzerland ranks highly on the Tax Foundation’s 2014 International Tax Competitiveness Index (ITCI), scoring third out of 34 OECD countries, in part due to its lack of a national estate tax. Four of the 26 Swiss cantons (government entities similar to American states) have inheritance taxes that apply directly to children, while rates on inheritors other than children vary from 0 percent up to 50 percent.

The rejection of the inheritance tax spells good news for Swiss industry, which is comprised mostly of small and mid-sized businesses and whose export sector has been rocked by the rapid appreciation of the Swiss franc earlier this year.

Inheritance taxes are assessed on the amount of an estate directly received by the estate’s beneficiaries, as opposed to an estate tax, which is assessed directly on the estate. In practice, however, they have the same effect on investment and the economy. Estate and inheritance taxes tend to repress entrepreneurship and have a low impact on overall revenue.

The U.S., which has the OECD’s fourth highest estate tax at 40 percent and is ranked 32^nd out of 34 OECD countries on the ITCI, has seen revenue raised by the estate tax decline by 52.6 percent since 2001.

We estimate that removal of the estate tax would boost GDP, increase the capital stock, and even eventually increase federal revenue. Congress would be wise to follow Switzerland’s example by rejecting any proposed increase of the federal estate tax, while moving to eventually abolish it.