Inheritances in Austria: A model estimation of intergenerational wealth transfers up to 2050

Grünberger, Klaus; Derndorfer, Judith; Schnetzer, Mattias Working Paper Inheritances in Austria: A model estimation of intergenerational wealth transfers up to 2050 JRC Working Papers on Taxation and Structural Reforms, No. 4/2024 Provided in Cooperation with: Joint Research Centre (JRC), European Commission Suggested Citation: Grünberger, Klaus; Derndorfer, Judith; Schnetzer, Mattias (2024) : Inheritances in Austria: A model estimation of intergenerational wealth transfers up to 2050, JRC Working Papers on Taxation and Structural Reforms, No. 4/2024, European Commission, Joint Research Centre (JRC), Seville This Version is available at: https://hdl.handle.net/10419/306590 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Grünberger, K., Derndorfer, J., Schnetzer, M. 2024 JRC Working Papers on Taxation and Structural Reforms No. 4/2024 Inheritances in Austria: A model estimation of intergenerational wealth transfers up to 2050 JRC138223 Seville: European Commission, 2024 © European Union, 2024 The reuse policy of the European Commission documents is implemented by the Commission Decision 2011/833/EU of 12 December 2011 on the reuse of Commission documents (OJ L 330, 14.12.2011, p. 39). Unless otherwise noted, the reuse of this document is authorised under the Creative Commons Attribution 4.0 International (CC BY 4.0) licence (https://creativecommons.org/licenses/by/4.0/). This means that reuse is allowed provided appropriate credit is given and any changes are indicated. For any use or reproduction of photos or other material that is not owned by the European Union permission must be sought directly from the copyright holders. How to cite this report: European Commission, Joint Research Centre, Grünberger, K., Derndorfer, J. and Schnetzer, M., Inheritances in Austria: A model estimation of intergenerational wealth transfers up to 2050, European Commission, Seville, 2024, JRC138223. This document is a publication by the Joint Research Centre (JRC), the European Commission’s science and knowledge service. It aims to provide evidence -based scientific support to the European policymaking process. The contents of this publication do not necessarily reflect the position or opinion of the European Commission. Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use that might be made of this publication. 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Contact information Name: Klaus Grünberger Address: Edificio EXPO, c/ Inca Garcilaso 3, 41092 Sevilla, Spain Email: Klaus.GRUNBERG[email protected]a.eu EU Science Hub https://joint -research-centre.ec.europa.eu 1 Contents Abstract ....................................................................................................................................................................... 2 Acknowledgements .................................................................................................................................................. 3 Executive summary ................................................................................................................................................. 4 1 Introduction .......................................................................................................................................................... 5 2 Data and methodology ..................................................................................................................................... 6 2.1 Household Finance and Consumption Survey (HFCS) ................................................................................................................................................ 6 2.2 The Inheritance Tax Simulation Model (INTAXMOD) ................................................................................................................................................... 7 2.3 Tax scenarios ....................................................................................................................................................................................................................................... 8 3 Results of the simulation .............................................................................................................................. 11 3.1 Volume and distribution of inheritances ......................................................................................................................................................................... 11 3.2 Revenue and distribution of inheritance taxes ............................................................................................................................................................ 12 4 Conclusions ......................................................................................................................................................... 15 References ................................................................................................................................................................ 16 List of abbreviations and definitions ............................................................................................................. 18 List of figures .......................................................................................................................................................... 19 List of tables ........................................................................................................................................................... 20 Annexes ..................................................................................................................................................................... 21 2 Abstract Since the end of inheritance and gift tax in 2008, there has been hardly any data on the distribution and volume of inheritances in Austria. Voluntary household surveys capture past inheritances, but there is a lack of current values as well as forecasts on the future development of inheritances. Using data from the Household Finance and Consumption Survey (HFCS) and the microsimulation model INTAXMOD, this paper estimates the annual inherited wealth and the potential tax revenue up to 2050. The results show (a) a doubling of the annual inheritance volume between 2025 and 2050 from approximately €21 to 41 billion, (b) a strong concentration in the upper percentile of the inheritance distribution, and (c) potential tax revenues of over €1 billion per year from inheritance taxes with tax exemption of €1 million. 3 Acknowledgements The authors would like to thank Stefan Humer, Severin Rapp, and colleagues from the Department of Economics and Statistics at the Vienna Chamber of Labour for their valuable and helpful comments that led to a revision of this article. The content of this article does not reflect the official opinion of the European Commission. The responsibility for the information and views expressed in the article lies entirely with the authors. A German version of this article was published under the title “Erbschaften in Österreich: eine Modellschätzung intergenerationeller Vermögenstransfers bis 2050” in Wirtschaft und Gesellschaft 50 (1): 21–41. The translation of the original German text was produced with the assistance of GPT@JRC, a generative AI technology provided by the Joint Research Centre (JRC), and revised by Maria Slater. Authors Grünberger, Klaus Derndorfer, Judith Schnetzer, Mattias 4 Executive summary Policy context The distribution of wealth and the role inheritances play in that distribution are topics of considerable economic and social importance, particularly in countries like Austria, where wealth inequality is notably high. Austria's wealth distribution is among the most unequal in the Eurozone, with the top 5% of the population holding about 53% of total wealth and the top 1% controlling nearly 40%. Such disparities have significant implications for societal well-being and for the prospects of upward mobility for future generations. The concentration of wealth through inheritances has been a subject of debate and research, especially in light of findings that a substantial portion of Europe's wealth—between 50 and 60%—is inherited. This high level of inherited wealth suggests that current wealth stocks are significantly influenced by wealth transfers from previous generations, a trend that appears likely to continue, if not increase, with the anticipated wealth transfer from the aging baby boomer generation. The role of inheritances in wealth accumulation raises questions about the meritocratic nature of societies. While some research suggests that inheritances can have a levelling effect on wealth distribution, particularly at the lower end of the spectrum, others argue that inheritances exacerbate wealth disparities, especially when comparing individuals with similar lifetime earnings. Policy responses to the challenges posed by unequal wealth distribution often centre on taxes on inheritances and gifts. These taxes are implemented in most OECD countries and are generally viewed as an efficient means of taxation, having lower administrative and efficiency costs compared to other methods of taxing the wealthy. However, Austria currently stands out for its lack of an inheritance tax, a situation that has persisted since 2008, following a court ruling that identified legal issues with the existing tax framework. Given the potential of inheritances to shape wealth distribution in the coming years, it is critical to explore the future landscape of wealth transfers and the possible implications of reintroducing inheritance taxation in Austria. This article aims to project the annual volume of inheritances up to 2050 and assess the potential revenue that could be generated by different tax rates, thereby informing the debate on economic policies that could address the challenges posed by wealth inequality and intergenerational wealth transfers. Main Results Using data from the Household Finance and Consumption Survey (HFCS) and the INTAXMOD microsimulation model, this study estimates the future volume of inheritances and potential tax revenues in Austria up to 2050. The key findings are: Doubling of Inheritance Volume: The annual volume of inheritances is projected to double from approximately €21 billion in 2025 to €41 billion by 2050. This is due in part to demographic changes, as particularly high-birth cohorts reach the end of their lives. On the other hand, the cohorts bequeathing their wealth during this period are also relatively wealthy. The increase in inheritance tax revenue is therefore explained by both an increase in the number of inheritance cases and by higher average inheritances. Concentration of Wealth: Inheritances are highly concentrated in the upper percentile of the distribution, indicating that the wealthiest segments of the population will continue to receive the largest transfers. Potential Tax Revenues: Depending on the tax scenarios, simulations show that annual tax revenues between €900 million and €1.8 billion can be expected in the year 2025 if inheritance taxes were reintroduced – even with the usual magnitudes of avoidance effects found in the literature. If inheritance taxes were reintroduced with an exemption threshold of €1 million, only 0.2% of heirs would be affected. Even with a €500,000 exemption, less than 1% of heirs would be affected, yet substantial revenues could be generated. By 2050, the expected annual tax revenues would increase to amounts between €1.8 billion and €2.9 billion, depending on the tax scenario. The estimates of future inheritance volumes and inheritance tax revenues are based on conservative assumptions regarding the wealth accumulation of individuals throughout their lifetimes. Therefore, the projections presented in this paper should be considered a lower bound. 5 1 Introduction The distribution of private household wealth in Austria is significantly more unequal than in almost all other Eurozone countries. According to newly published data from the “Distributional Wealth Accounts” of the European Central Bank (ECB), in 2023 the only place where wealth was more concentrated than in Austria was Latvia (ECB 2024). The top 5% of the population in Austria owns about 53% of total wealth, while other studies have estimated that the share of the wealthiest 1% of the population amounts to almost 40% of total wealth (Heck et al. 2020; Disslbacher et al. 2020). A strong concentration of wealth not only affects the economic, social, and ecological living conditions of our current society but also impacts future generations. This is because intergenerational wealth transfers limit the possibilities for social mobility and perpetuate distributional imbalances across generations (Clark/Cummins 2015; Corak 2013). Quantifying the significance of wealth transfers is the subject of a long-standing academic debate, especially in the USA (Kotlikoff 1988; Modigliani 1988). Research in this area attempts to measure the share of wealth transferred in the past as a portion of the current wealth stock. In a recent study of the total wealth in Europe, the share that had been inherited was estimated to be between 50 and 60% (Alvaredo et al. 2017). Indeed, according to these calculations, the proportion of transferred wealth at the beginning of the 20th century was well over 70%. In the near future, the contribution of wealth transfers could rise again, as demographic forecasts anticipate the passing of the baby boomer generation in the coming decades. Meritocratically shaped societies are challenged by the benefits tied to wealth accumulation via intergenerational transfers. If a person’s position in the income and wealth distribution depends heavily on their family background rather than personal effort, the prevailing legitimization narratives for social orders may come under pressure. There is no consensus in the literature on whether wealth transfers have an exacerbating or mitigating effect on wealth distribution. Some papers find a levelling effect due to the greater relative importance of inheritances at the lower end of the distribution (Adermon et al. 2018; Elinder et al. 2018), while others view inheritances as a crucial source of wealth differences among people with equal life cycle incomes (De Nardi/Yang 2014). However, this levelling effect is only reflected in relative distribution measures, whereas absolute wealth differences increase through inheritances. Behavioural adjustments following the receipt of inheritances, especially increased consumption in the lower distribution range, further reduce the levelling effect (Elinder et al. 2018). In Austria, receiving an inheritance on average, lead to a 17-percentile rise in wealth distribution. To achieve the same increase through income alone, a household would have to climb an average of more than 50 percentiles in the income distribution (Fessler/Schürz 2018). Hence, inheritances play a much more significant role in wealth formation than income. Taxes on inheritances and gifts are the most common economic policy instruments to limit the potential impacts of unequal intergenerational transfers on wealth accumulation. In the political debate, additional government revenue from inheritance taxes is often cited as a tool that can help address the financial challenges facing the welfare state in light of demographic changes. These interventions typically apply to the estates of the deceased as well as to inter vivos transfers of wealth. 24 of the 36 OECD countries levy such taxes, with a general distinction made between a common inheritance tax on the estate after distribution among beneficiaries and a less common estate tax before distribution. An estate tax is implemented in only four OECD countries, namely Denmark, South Korea, the United Kingdom, and the USA (OECD 2021). In general, inheritance taxes are seen as an efficient form of taxation – with lower administrative and efficiency costs than other forms of taxing the wealthy (OECD 2021). An overview of the economic efficiency of an inheritance tax in terms of administrative costs, decedents, heirs, and businesses is provided by Bernhofer et al. (2024). In Austria, no inheritance or gift tax has been collected since 2008 after the Constitutional Court identified serious flaws in the then existing legal situation that the government did not correct. This article is dedicated to the question of how inheritances will evolve over the coming years and what revenue potential could be realized if taxation were reintroduced in Austria. Based on wealth data from the Household Finance and Consumption Survey (HFCS) of the Austrian Central Bank (OeNB), we model the annual volume of inheritances up to 2050 and calculate the revenue potential for different tax rates. 6 2 Data and methodology This chapter outlines how the future volume of inheritances is estimated based on existing wealth data for Austria. The starting point for these considerations is the demographic change, which is expected to lead to a significant increase in the annual volume of inheritances in the coming decades. Figure 1 shows a comparison of the population pyramids for the years 2025 and 2050. There is a clear increase in the older age groups. In this context, Statistics Austria predicts a strong rise in the number of annual deaths from around 85,000 at the end of the 2020s to over 110,000 in the 2050s. In a few decades, therefore, over 20,000 more people will die each year than today. Even though these forecasts are made on the basis of certain assumptions and are associated with statistical uncertainties, they do indicate a rising number of intergenerational wealth transfers. Figure 1: Population pyramid by age and gender in 2025 and 2050 Source: Statistics Austria Next, we briefly outline our estimation approach. In the following subchapters the individual steps are described in more detail. The basis of this study is the survey data from the Household Finance and Consumption Survey (HFCS) from 2017, which we adjust for the underrepresentation of wealthy households. This data adjustment is made under the assumption that the distribution of private household wealth at the top can be approximated by a Pareto distribution. Finally, the adapted wealth data and selected household characteristics are fed into the inheritance tax model INTAXMOD, which estimates annual wealth transfers based on demographic forecasts. The predicted intergenerational wealth transfers are subsequently used to calculate tax revenues from different tax rates. 2.1 Household Finance and Consumption Survey (HFCS) Since 2010, the Austrian Central Bank (OeNB) has been collecting data on the household balance sheets of private households in Austria as part of the Europe-wide Household Finance and Consumption Survey (HFCS).1 The primary goal of the survey is the early assessment of risks regarding macroeconomic shocks on the financial stability of private households. The survey data has also enabled, for the first time, a more precise analysis of wealth and indebtedness in Austria. While the HFCS provides high-quality data on the assets of wide swathes of the population, households at the upper end of the distribution are strongly underrepresented. This is partly due to the low probability of including very wealthy households in the small sample size of the survey. Additionally, the wealthiest are less likely to participate in the voluntary survey and disclose information about their assets. Since a large portion of the total wealth in Austria is concentrated at the upper end of the 1 At the time of the empirical work on this paper, the 2017 HFCS survey wave was the most recent data set available. The HFCS 2021 was published in the autumn of 2023; however, the collection phase coincided with the COVID-19 pandemic, resulting in a response rate of 39% (compared to 50% in 2017) that might render results less representative. 13 Table 2: Results from INTAXMOD for 2025 and 2050 Model I (proportionate, TA 500K) Model II (proportionality, TA 1M) Model III (progressive, TA 500K) Model IV (progressive, TA 1M) Model V (German model) 2025 Affected heirs 0.9% 0.2% 0.9% 0.2% 1.8% Average estate €219,100 €219,100 €219,100 €219,100 €219,100 Average inheritance €83,300 €83,300 €83,300 €83,300 €83,300 Average inheritance tax €4,300 €6,600 €7,000 €8,900 €6,500 Average inheritance of inheritance tax payers €3,641,400 €12,638,800 €3,641,400 €14,532,700 €1,409,100 Average inheritance tax of inheritance tax payers €471,200 €2,909,700 €757,400 €5,612,400 €357,700 Total volume with avoidance effects €892,000,000 €1,354,000,000 €1,433,000,000 €1,828,000,000 €1,332,000,000 Total volume without avoidance effects €1,176,000,000 €1,752,000,000 €1,877,000,000 €2,417,000,000 €1,753,000,000 2050 Affected heirs 1.5% 0.5% 1.5% 0.4% 1.7% Average estate €259,800 €259,800 €259,800 €259,800 €259,800 Average inheritance €103,200 €103,200 €103,200 €103,200 €103,200 Average inheritance tax €5,600 €8,200 €8,900 €9,100 €7,300 Average inheritance of inheritance tax payers €3,043,300 €7,160,700 €3,043,300 €8,048,700 €1,885,400 Average inheritance tax of inheritance tax payers €381,500 €1,540,200 €605,900 €2,560,800 €438,000 Total volume with avoidance effects €1,768,000,000 €2,599,000,000 €2,807,000,000 €2,855,000,000 €2,296,000,000 Total volume without avoidance effects €2,336,000,000 €3,414,000,000 €3,702,000,000 €3,873,000,000 €3,087,000,000 Notes: TA = tax-free allowance. Overall, in 2025 the proposed models here could generate tax revenues ranging from €1.2 billion (model I) to €2.4 billion (model IV). Potential avoidance effects and behavioural changes could reduce the revenue from an inheritance tax. For this scenario, we refer to the empirical estimates by Bach/Beznoska (2012), who consider elasticities between a wealth tax of 1% and the tax base for Germany. Avoidance reactions can vary between wealth and inheritance taxes and across national borders, but the main focus here is on an assessment of empirically known behavioural adjustments on the simulation results. For this purpose, real estate assets are reduced by 20%, financial assets by 24%, business assets by 13%, and other assets by 100%. Even assuming these avoidance effects, the estimates for total revenue range from €900 million (model I) to €1.8 billion (model IV). Due to demographic dynamics, by 2050 the average inheritance increases by 24% to €103,200 (in values fo 2022). The proportion of those who would have to pay inheritance tax under the given rates increases to 0.4% (model IV), 0.5% (model II) and 1.5% (models I and III). In model V, the proportion of affected heirs decreases slightly from 1.8% in 2025 to 1.7% by 2050. In this model, non-related heirs have to pay inheritance tax above a personal allowance of €20,000, which is why the 14 proportion of affected heirs is higher than in the other models, which do not differentiate by degree of kinship. In the forecast for 2050, the proportion of non-related heirs decreases, which leads to a lower proportion of affected heirs.4 Since the forecast for 2050 shows more heirs are affected than in 2025 (with the exception of model V), the average taxable inheritance, and thus the average inheritance tax, is reduced. In 2050, the inheritances subject to tax amount on average to €1.9 million (model V), €3.0 million (models I and III), €7.2 million (model II) and €8.0 million (model IV). On average, affected heirs must pay between €380,000 (model I) and €2.6 million (model IV) to the tax office, depending on the model configuration. Figure 4: Estimated tax revenue for 2025 and 2050 Source: own calculations The total revenue from an inheritance tax without avoidance effects is estimated to be between €2.3 billion (model I) and €3.9 billion (model IV) for 2050, as shown in Figure 4. Even with potential avoidance effects, state revenues of between €1.8 billion (model I) and €2.9 billion (model IV) are expected. A comparison of the two observation points of 2025 and 2050 indicates that tax revenue, depending on the model, will increase by roughly 30% by 2030, by 80% by 2040 and by 90% by 2050.5 This means that tax revenue nearly doubles by 2050, which is due in part to demographic changes, as particularly high-birth cohorts reach the end of their lives. On the other hand, the cohorts bequeathing their wealth during this period are also relatively wealthy. The increase in inheritance tax revenue is therefore explained by both an increase in the number of inheritance cases and by higher average inheritances. In Figure 6 in the annex, the estimated revenues – taking into account avoidance effects – are broken down according to the different data adjustments. It can be seen that the raw data from the HFCS would lead to a very low revenue estimate due to the under-reporting at the top of the distribution. The estimation of very wealthy households using the Pareto method contributes the most in all models, but adjustments to property values, financial assets, and business assets also have significant effects . 4 In the simulation model, non-related heirs are only assumed for individuals living alone; otherwise, the inheritance goes to partners and children. Single individuals tend to be older, and their statistical weight decreases over the projection period, ensuring that the projection sample remains representative. For this reason, single individuals and consequently non-related heirs are less significant in 2050. 5 With the exception of model V, according to which the tax revenue increases by only 72% by 2050. 15 4 Conclusions Almost all Western European countries levy an inheritance and gift tax. Austria has been the exception since 2008, after the Constitutional Court found the taxation of real estate to be discriminatory in 2007, and the government at the time let the deadline for the required amendment lapse. At the same time, Austria is the country that, compared to the rest of Europe, has one of the highest concentrations of private wealth that is also inheritable. Therefore, the reintroduction of an inheritance and gift tax is regularly discussed in economic policy debates as a means of reducing the intergenerational persistence of wealth inequality and of strengthening equality of opportunities. Additionally, the tax revenue estimated in this study can be used for fiscal measures to reduce the wealth gap further. Austrian tax experts consider the practical implementation and integration of an inheritance tax into the existing tax structure to be sensible and feasible (Bernhofer et al. 2024; Krenek et al. 2022). Among economists, inheritance tax is often preferred over a general wealth tax due to easier administration and fewer behavioural adjustments (Bastani/Waldenström 2020). However, among the population, there is usually greater approval for wealth taxes than for inheritance taxes (Fessler et al. 2019), although the degree of support varies greatly with the specific design. Only very few heirs will be affected by the kind of inheritance tax discussed here, due to the strongly right-skewed distribution of inheritances in combination with high allowances. In models with allowances of one million euros per heir, only the top 0.2% are affected. Even with an allowance of €500,000, fewer than 1% of heirs have to pay the tax. Despite the very small number of taxpayers, substantial tax revenue can be expected, even if the relative contribution to total tax revenues of around €127 billion in 2022 is moderate. Depending on the tax scenarios, simulations with the microsimulation model INTAXMOD show that currently annual tax revenues between €900 million and €1.8 billion can be expected – even with the usual magnitudes of avoidance effects found in the literature. Since the strong demographic change in Austria is having a significant impact on intergenerational wealth transfers, the annual volume of inheritances is expected to rise from €21 billion in 2025 to €41 billion by 2050. Accordingly, a large increase in potential tax revenues can be expected. The estimated tax revenue should be seen as a lower bound due to the conservative assumptions made in the simulation model. It can therefore be assumed that the actual tax revenue will be higher than the values simulated here. Moreover, including foundation assets in an inheritance tax would lead to a further significant increase in tax revenue. The OECD also attributes an important role to inheritance taxes in the tax structure (OECD 2021). The institution sees good reasons for inheritance and gift taxes, provided they are well designed and implemented in a fair, efficient, and administratively feasible manner. This recommendation is particularly relevant for those countries where the taxation of capital income and wealth is only rudimentary, which is the case in Austria. In the economic policy discussion in Austria, it is regularly proposed to link inheritance tax to the additional expenditures needed for the care system, which are driven by demographics. 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Available online at www.cfe-database.org (accessed on 05.03.2021). 18 List of abbreviations and definitions ECB European Central Bank HFCS Household Finance and Consumption Survey OECD Organisation for Economic Co-operation and Development OeNB Oesterreichische Nationalbank (Austrian Central Bank) 19 List of figures Figure 1: Population pyramid by age and gender in 2025 and 2050 .................................................................................................................6 Figure 2: Evolution of the estimated inheritance volume, 2025–2050 .......................................................................................................... 11 Figure 3: Distribution of estimated inheritances in the years 2025 and 2050............................................................................................ 12 Figure 4: Estimated tax revenue for 2025 and 2050 ........................................................................................................................................... 14 Figure 5: Inheritance volume by estimation method ............................................................................................................................................. 21 Figure 6: Tax revenue by estimation method ........................................................................................................................................................... 21 20 List of tables Table 1: Tax scenarios for the simulation in INTAXMOD ..........................................................................................................................................9 Table 2: Results from INTAXMOD for 2025 and 2050 .......................................................................................................................................... 13 21 Annexes Figure 5: Inheritance volume by estimation method Source: own calculations Figure 6: Tax revenue by estimation method Note: Tax revenue, taking into account avoidance effects. 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