Why is donation related taxation significantly smaller than inheritance taxation?

Question

Note: this is related to this question

Inheritance tax seems to vary very much from one state/country to another and where I live is virtually nonexistent (you pay 1% only if inheritance is disputed after more than two years).

I also noticed a big difference between donations (gifts) to close relatives and inheritance. I will consider UK as an example:

• Gifts given more than seven years before you die are exempt from Inheritance Tax
• If you die less than seven years after you have gifted money, the gift will be subject to Inheritance Tax

So, one can partially avoid inheritance taxation if using gifts (donation) soon enough. However, this means that the reasons provided in this answer (dumb money, economic inequality prevention) do not seem to work for donations.

Question: Why is donation related taxation significantly smaller than inheritance taxation?

Note: I feel that this difference exists in many countries which have a pretty large inheritance taxation, but I will narrow the question to UK to make it more answerable. Any general answer is greatly welcomed though.

Answer 1

Practicality of record keeping

Say you give your child a car as a sixteenth birthday present. Forty years later you die and leave the same child all your belongings. It is impractical for the government to look up the records on that gift forty years later. The dealer may have gone out of business. The child may have forgotten about it as a gift and may never have known its exact value. In this example, you would be dead and perhaps didn't keep good records. Or the records were lost in a fire and can't be reconstituted.

Record tracking is improving. This may be more feasible with today's computers. But many of these systems were created when all records were on paper. There wasn't space to store a hundred years of records. Old records would simply be thrown away. The last seven years was a practical limitation.

In addition, there may be confusion about how much is given. The car may be the big purchase, but in this example, you would presumably be feeding and housing the child as well. Are those gifts? The kid comes to you and says, "Hey, I'm going out with [someone]. Can I have $50 for gas and other expenses?" Is that a gift? How would the government know how much it was? In general, those things do not count as gifts.

United States

The United States has a different approach than the United Kingdom. The US requires all substantial monetary gifts be reported. So each year, you would have to report for each recipient you gave more than $15,000 (in 2018; was $14,000 in 2017). You would either owe gift tax or more normally you'd use up some of your estate tax exclusion ($11,180,000 in 2018). But this relies on timely reporting. Like the UK, if it's not caught in the first few years, it's not fixable. Unlike the UK, it was illegal at the time it occurred.

This puts more of the onus of record keeping on the government and less on individuals. It puts more onus on the individual in terms of reporting.

Economic inequality

There is also an argument that you are partially addressing income equality by shifting money from one age group to another when you give gifts. The older giver will tend to be wealthier than the younger recipient. So gifting does reduce economic inequality at the time of the gift. Of course, it only does so within the gifting group and such wealth tends to clump.

With inheritances, the entire estate is moving. It may not even split, depending on the number of heirs. With gifts, only a small part of the estate moves. So gifts tend to reduce economic inequality where inheritances often perpetuate it. This is so even though gifts aren't disseminated broadly. I.e. most people don't gift to random homeless people but to their own relatives. And the relatives of rich people are far more likely to be at least middle class rather than poor. But it's still a reduction in inequality even if a greater reduction would be possible.

Answer 2

It's because those two things are very different. When you give away your resources to a charitable cause you are producing a benefit to society. An inheritance goes directly to private individuals and does not produce the same societal benefit.

It's also common to see charitable donations as being a kind of optional tax (both are a person spending their resources for the benefit of society, rather than themselves). In this vein, it doesn't make sense to tax them because you are basically taxing taxes.

There are a litany of different views from the political thought side. Here are a few interesting ones. This is by no means comprehensive, but the question didn't specify what kind of perspective you wanted.

Marxists on Inheritance Taxes

Although I don't know of a case where Marx specifically discussed these kinds of taxes, there is plenty of Marxist writing about estate taxes. In this view, inheritance is a social problem: the wealthy pass on their wealth to their children, perpetuating the enslavement of the workers. The poor have no wealth to pass on, which means their children will also likely be poor. Another angle is that inheritance often passes on the means of production (business ownership, valuable industrial/commercial equipment, etc.) which is especially important when talking about perpetuating this problem.

Marxists advocate for a high inheritance tax to reduce this problem. Sometimes they suggest values as high as 100% on private (but not usually personal) property.

To read more: google "marx estate tax". You will find thousands of articles.

Carnegie and Tocqueville on Non-Profits

Pluralist thought usually thinks of non-profit organizations as providing social services that the government doesn't. Donations are effectively someone wanting to pay more in taxes than they are.

One example: de Tocqueville's "Democracy in America" describes the role of civic associations in America. This article discusses his book in a fairly typical fashion. The basic gist is that since volunteering (either labor or financial resources) provides a benefit to society, it doesn't need to be taxed. It contains this great quote from a non-profit executive:

When we as individuals, however, volunteer our hard-earned dollars to advance society by freely giving from our own pockets, government taxes us less. The government gives us a tax deduction. As a matter of public policy, the law of the land rewards us for taking a personal role in the advancement of society. We are able to give less to Caesar when we give more to others.

Another famous iteration of this idea was in Carnegie's "Gospel of Wealth". Carnegie espoused the idea that the rich have a responsibility to use their wealth for the advancement of society. When you give your wealth to your own family upon your death, it means primarily two things: you failed to use it to advance society (because you still had it) and you failed to find a productive use for it (because it only benefited your family).

Carnegie doesn't connect this to tax policy. But if you accept his arguments and you wonder how to encourage charitable spending and discourage inheritances than of course you increase the estate tax rate and decrease taxes on charitable donations.

Answer 3

The intent for large inheritance taxes in countries that have them is to avoid the concentration of wealth into a few families.

A relative gifting money to family members obviously retains the family connection, but the argument would be that it's not the entirety of the gifter's net worth, as they still plan on living and spending money. And, as mootmoot commented, most countries put a cap on how much you can gift at the reduced tax rate.

In other words, it's not a loophole--a wealthy patriarch can not 'gift' their entire wealth to family members prior to their departure due to the caps on gift allowances.

The UK law clearly intends it to truly be a charitable gift of $3000 or less.

I can't speak with any certainty as to why there is the 7 year clause, but I suppose it could be to avoid getting rid as much of one's wealth prior to death to purposefully avoid the inheritance tax on at least that amount (most people can't predict their death 7 years out).