Routing the nest

No governmental system seems to have come up with a plausible replacement for tax in order to finance a state, so, incontestably, it is the duty of a citizen to pay tax if citizens wish to conserve the state. Paying taxes is unpleasant because the immediate but erroneous perception is that one is parting with money without tangible acquisition. Yet a distinction must be made between just and unjust taxes because earning money is a serious matter and parting with it should be given equal consideration.

How can we distinguish between what is just and what is unjust with regard to taxes? I propose the following tenets as operative criteria for the assessment of the justice or injustice of any tax law:

1) It must not change the legitimate lifestyle of an individual to which he/she is entitled through the honest application of possessed skills or management of property.

2) It must not cause the forced sale and loss of legally-acquired property in order to pay dues to the state accruing from the possession of such property.

3) It must not cause division between or within classes or members of a family.

4) It must not be so vague as to be liable to subjective or arbitrary interpretations by officials, nor so complicated as to force individuals to seek expert and costly help in order to understand it, unless such expenses are recoverable.

5) It should not cause the dissolution of the power of what is called a family, this power being recognised as its financial and proprietorial possessions, the word family implying a chronologically-changing group of people sharing consanguinity.

If these conditions are not met, a law is unjust. A tax law should be of benefit to the community without grieving, harming or despoliating the taxpayer or imperiling or destroying the social or financial identity and standing of a family.

In view of these tenets, which no legislator would contest without peril, one may have doubts whether the present situation is completely just. The state has disregarded the justified emotional attachment of a taxpayer to a particular property and reduced it to a sum of money. Ignoring this, and the grief that is felt when cherished things have to be sold under constraint, is insensitive and cynical.

In Malta, the heirs pay two taxes. One is the tax due in cash to the notary public on causa mortis. If one of the heirs wants to liquidate his share of the property, the others must pay him in order for them to retain the property. If this happens, he (the receiver of the sum) shall also be subject to the second tax, called the capital gains tax, and he would probably want the tax included in the sum he expects from his co-heirs. If the co-heirs are not in a position to pay, they would have to sell the property to third parties, usually at a price which would include the total capital gains tax. The cruelest scenario is when one of the co-heirs lived with the parents but does not have the money to satisfy his brothers/sisters, something which has become quite common. A mitigated form of eviction necessarily takes place and this produces stress and grief.

Such a person will not feel that justice has been done. He has lost his parents, his domicile and with whatever money remains (after two tax interventions) he must try to find alternative lodging. He will also feel that a houseful of memories has been destroyed, and that something close to holy shall be desecrated. A law which ignores these feelings and which so routs a person's life cannot be just.

My contention with the present law is limited to this: it does imperil the paternal house in the case of it being a sole property. That single property is the personification in material terms of the personality and opus of the bequeathers as well as their humble status. In a sense it is their monument.

If, before, one such heir would have naturally been burdened with paying his share of the property to his co-heirs, he now has the added burden of finding the money to pay the state handsomely, as well. The state has become a "surprise" inheritor. For many, this will be impossible.

But what about other countries? In the United States, the federal government levied inheritance taxes during the civil war period and again during the Spanish-American war; since 1916, however, a progressive estate tax has been imposed. The law of 1981 greatly reduced estate and gift taxes by raising exemptions and lowering rates and a 2001 law calls for the phasing out of the federal estate tax by 2012.

In the United Kingdom, death duty was first introduced as a tax on estates over a certain value in England and Wales from 1796; then called legacy, succession and estate duty, it was replaced in 1975 by capital transfer tax, which was replaced by inheritance tax (IHT) in 1986. The current rate is 40 per cent on the value of all the estate over £263,000. If there is insufficient cash to pay the tax and the solicitors' bill, then assets must be sold.

Death duty was abolished in Australia in 1981. In Canada Brian Mulroney repealed inheritance tax in the 1980s. Sweden abolished the inheritance tax and gift taxes in 2005.

Denmark, Ireland, Italy and Luxembourg have no inheritance tax. The bar chart shows the position of several European countries before Sweden's abolition of the tax.

Not all states, then, feel comfortable with the idea of taxing inherited property and money. Many states show misgivings about this form of tax and many others are starting to shun it, almost as a shameful thing.

If I am troubled by the injustice of imperiling the paternal home as a sole property in Malta, the situation in Germany is quite different: On May 6 the German Cabinet abolished inheritance tax on small family firms provided they keep operations going for 10 years after Theo Müller, head of the Müller-Milch dairy firm with 4,500 workers, caused a storm in Germany by moving from Augsburg to Switzerland in 2003 to save his family business from the disastrous effects of tax. The complex tax started at seven per cent for tiny firms but quickly rose, reaching 30 per cent or even more for companies worth over €25 million. It is not necessary to have property estimated at €25 million here in Malta to pay not at 30 per cent but at 35 per cent!

The final point is that the paternal house is usually inherited after about 30 years from the date of acquisition. The price of property has risen astronomically in 30 years and the law taxes you on the difference between the price for which it was acquired then and the present market value. Nasty surprises are certainly in store. It is advisable for householders to seek professional counsel about their position and, more importantly, about the financial impact of their demise upon those for whom they decided to own a house. They may find that what they considered as a virtuous undertaking may turn out to be a curse.