Inheritance tax

A hated tax but a fair one

The case for taxing inherited assets is strong

NO TAX is popular. But one attracts particular venom. Inheritance tax is routinely seen as the least fair by Britons and Americans. This hostility spans income brackets. Indeed, surveys suggest that opposition to inheritance and estate taxes (one levied on heirs and the other on legacies) is even stronger among the poor than the rich.

Politicians know a vote-winner when they see one. The estate of a dead adult American is 95% less likely to face tax now than in the 1960s. And Republicans want to go all the way: the House of Representatives has passed a tax-reform plan that would completely abolish “death taxes” by 2025. For a time before the second world war, Britons were more likely to pay death duties than income tax; today less than 5% of estates catch the taxman’s eye. It is not just Anglo-Saxons. Revenue from these taxes in OECD countries, as a share of total government revenue, has fallen sharply since the 1960s. Many other countries have gone down the same path. In 2004 even the egalitarian Swedes decided that their inheritance tax should be abolished.

Yet this trend towards trifling or zero estate taxes ought to give pause. Such levies pit two vital liberal principles against each other. One is that governments should leave people to dispose of their wealth as they see fit. The other is that a permanent, hereditary elite makes a society unhealthy and unfair.

How to choose between them?

When the heirs loom

Some people argue for a punitive inheritance tax. They start with the negative argument that dead people no longer enjoy the general freedom to disburse their wealth as they wish—as the dead have no rights. How could they, when they are not affected one way or the other by what happens in the world?

That does not ring true. The logic would be to abrogate even the most modest of wills. But inheritances are deeply personal and the biggest single gift that many give to causes they believe in and loved ones they may have cherished. Many (living) people would feel wronged if they could not provide for their children. If anything, as the expression of their last wishes, bequests carry more weight than their passing fancies do.

The positive argument for steep inheritance taxes is that they promote fairness and equality.

Heirs have rarely done anything to deserve the money that comes their way. Liberals, from John Stuart Mill to Theodore Roosevelt, thought that needed correcting. Roosevelt, who warned that letting huge fortunes pass across generations was “of great and genuine detriment to the community at large”, would doubtless be aghast at the situation today. Annual flows of inheritance in France have tripled as a proportion of GDP since the 1950s. Half of Europe’s billionaires have inherited their wealth, and their number seems to be rising.

However, in 2017, it is not clear exactly how decisive a role inheritance plays in the entrenchment of the hereditary elite. Data from Britain suggest that people tend not to lose their parents before they reach the age of 50. In rich countries the advantages that wealthy parents pass to their offspring begin with the sorting mechanism of marriage, in which elites increasingly pair up with elites. They continue with the benefits of education, social capital and lavish gifts, not in the deeds to the ancestral pile.

Even if the link between inheritance-tax rates and inequality were clear, wealth can pay for a good tax lawyer. In the century since Roosevelt, Sweden and other high-taxers discovered that if governments impose a steep enough duty, the rich will find ways to avoid it. The trusts they create as a result can last even longer than the three generations it takes for family fortunes to go from clogs to clogs.

Armed with such arguments, some leap to the other extreme, proposing, as the American tax reform does, that there should be no inheritance tax at all. Not only is it right to let people hand their private property to their children, they say, but also bequests are often the fruits of labour that has already been taxed. And a large inheritance-tax bill is destructive, because it can cause the dismemberment of family firms and farms, and force the sale of ancestral homes.

Yet every tax is an intrusion by the state. If avoiding double taxation were a requirement of good policy, then governments would need to abolish sales taxes, which are paid out of taxed income. The risks that heirs will be forced to sell homes and firms can be mitigated by allowing them to pay the duties gradually, from cashflow rather than by fire-sales.

In fact, people who are against tax in general ought to be less hostile to inheritance taxes than other sorts. However disliked they are, they are some of the least distorting. Unlike income taxes, they do not destroy the incentive to work—whereas research suggests that a single person who inherits an amount above $150,000 is four times more likely to leave the labour force than one who inherits less than $25,000. Unlike capital-gains taxes, heavier estate taxes do not seem to dissuade saving or investment. Unlike sales taxes, they are progressive. To the extent that a higher inheritance tax can fund cuts to all other taxes, the system can be more efficient.

Transfer market

The right approach is to strike a balance between the two extremes. The precise rate will vary from country to country. But three design principles stand out. First, target the wealthy; that means taxing inheritors rather than estates and setting a meaningful exemption threshold.

Second, keep it simple. Close loopholes for those who are caught in the net by setting a flat rate and by giving people a lifetime allowance for bequests; set the rate high enough to raise significant sums, but not so high that it attracts massive avoidance. Third, with the fiscal headroom generated by higher inheritance tax, reduce other taxes, lightening the load for most people.

A sensible discussion is hard when inheritance taxes prompt such a visceral reaction. But their erosion has attracted too little debate. A fair and efficient tax system would seek to include inheritance taxes, not eliminate them.

Stop the world. Germany is stepping off

The politics of plenty once led politicians to lift their sights to Europe. No longer

Philip Stephens

© Ingram Pinn

When last did a nation collapse under the unbearable weight of its prosperity? For a visitor in Berlin, Germany’s coalition talks straddled the line between complacency and smugness.

Elsewhere, European politicians are struggling to balance the books by cutting education spending and capping pensions. Angela Merkel and her prospective coalition partners spent a fruitless month arguing about how to share out the rich spoils of economic success.

If you believe the headlines, the failure of the chancellor’s Christian Democrats and their Bavarian sister party, the CSU, to strike a deal with the economically liberal Free Democrats and the leftish Greens has plunged the nation into crisis. No one has told the well-heeled Christmas shoppers crowding Berlin’s stores. Wages are high, unemployment is low and the government is awash with cash. Crisis, Germans are asking, what crisis?

The country has turned inward as well as rightward. The politics of plenty might have persuaded an earlier generation of postwar politicians to raise their sights to the future of Europe. Not this one. Now what you catch is a visible irritation with the troubles of Germany’s less fortunate partners in the eurozone. If they want to succeed, they should jolly well behave more like, well, Germany.

What was it that Ms Merkel said not so long ago about picking up the torch for liberal democratic values and working with French president Emmanuel Macron to advance the cause of European integration? By the account of those inside the talks, the chancellor now professes indifference. A coalition agreement should say nothing to offend Mr Macron directly. On the other hand, it need not make any commitments.

The breakdown of the talks was a shock to Berlin’s political establishment. A deal would be reached, everyone had previously agreed, because the alternatives of a minority government or another election were unthinkable. The Brexit vote in the UK, Donald Trump in the US, even the success of the nativist Alternative for Germany in September’s elections — these are things that should have taught us that politics is no longer played by the old rules.

Germany may have to get used to a new dynamic. By taking nearly 13 per cent of the vote, the AfD changed the arithmetic of traditional coalition building. Add its share to the 9 per cent score of the formerly communist Die Linke and more than a fifth of the seats in the Bundestag are now occupied by MPs shunned by the political mainstream. The permutations for workable coalitions have shrunk accordingly.

Political calculation on the part of the Free Democrats rather than irreconcilable policy collisions with the Christian Democrats and Greens scuppered Ms Merkel’s hopes for a Jamaica coalition — so called because the three parties’ colours match that of the Caribbean nation’s flag. There were real differences — about immigration controls, climate change, Europe, and tax and spending — but a mix of compromises and fudges had all but closed even the gaps between the Greens and the CSU.

The negotiators had money to burn. Publicly, they acknowledged that rising federal budget surpluses would give a new government a dowry of €30bn to spend on tax cuts and/or spending increases during its first year. According to one insider, the true figure was closer to €60bn. The politicians kept quiet because it would have been embarrassing to admit such riches while Germany’s neighbours struggle with austerity.

The FDP’s decision to collapse the talks owed more to political positioning than to the arguments about taxes and spending. The party has not yet recovered from the trauma of its last coalition with Ms Merkel — an interlude that saw it wiped out in the Bundestag at the subsequent election.

Its youthful leader Christian Lindner has decided that this time around the party should strike a nationalist pose. He has taken a hard line against Mr Macron’s eurozone plans and toughened up its stance on migration. Some in Berlin recall that the Free Democrats started out in the 1950s as a home for rightwing nationalists. Mr Lindner, they say, hopes to draw support from the AfD by returning the party to its roots.

For her part, Ms Merkel is down, but not out. The disgruntled in her own party lack an alternative candidate. The pundits who were certain of a Jamaica coalition are now equally sure that she will be forced into another election. They could be wrong again. After a bruising defeat in September, when they recorded their worst ever vote, the Social Democrats refused to join another grand coalition. But would they really prefer a second election? The chancellor says she does not want to lead a minority government. She could also change her mind.

Germany wants nothing to disturb its present good fortune. Ms Merkel has the looks of a politician who has run out of energy and ideas. It is not clear the people are terribly bothered.

“It was the right thing to do,” she still insists of her decision in 2015 to open Germany’s borders to the flood of Syrian refugees. Then the caveat: “I promise never to do it again.” The contradiction offers a fair description of the nation’s political mood.

The writer at present is a Richard von Weizsäcker Fellow of the Robert Bosch Academy in Berlin


Why AI Is Tipping the Scales in the Development of Self-driving Cars


When people think of self-driving cars, the image that usually comes to mind is a fully autonomous vehicle with no human drivers involved. The reality is more complicated: Not only are there different levels of automation for vehicles — cruise control is an early form — but artificial intelligence is also working inside the car to make a ride safer for the driver and passengers. AI even powers a technology that lets a car understand what the driver wants to do in a noisy environment: by reading lips.

In Silicon Valley, there is a race to develop the best technology for autonomous vehicles. “It’s perhaps among the most exciting times to be talking about autonomous vehicles,” said Wharton professor of operations, information and decisions Kartik Hosanagar on a panel at the recent AI Frontiers conference in Silicon Valley. “Ten years back, most of the work with autonomous vehicles was just going on in research labs and various educational institutions.” About five years ago, only Google and a handful of companies were testing them. “Today, there’s a frenzy of activity,” he said. “Just in California, the number of companies that have licenses to do testing and operating of driverless vehicles is already somewhere in the 30 to 50 range.”

Globally, the U.S. and China are ahead in the self-driving race. Germany and Japan, despite being famous for their autos, are behind. “The key difference is AI,” said Tony Han, co-founder of China-based autonomous vehicle company JingChi. “China and the U.S. are leading in AI.” When it comes to self-driving regulations, China and the U.S. also lead. What’s driving this intense interest are three mega-trends: the rising popularity of electric vehicles, emergence of the shared economy that is powering ride-sharing firms like Uber and Lyft, and advancements in artificial intelligence. If you think about it, he said, autonomous driving is really about combining a robot driver with an electric car.

According to Han, most autonomous vehicle firms are developing technology that is suitable for what he calls a level 4 roadster. There are five levels of automation in self-driving cars. Level 1 is the most minimal, with a typical feature being cruise control that has been around for years. Level 5 is the most advanced, with the vehicle being fully autonomous. Level 4 is a notch below — a highly automated level where the car can operate in certain situations without driver intervention or attention, such as in specially fenced off areas or in traffic.

AI Inside the Car

Danny Shapiro, senior director of automotive at chipmaker Nvidia, said tech companies take the development of autonomous vehicle technology seriously because the stakes are high. “This is not a recommendation engine for Netflix,” he said at the conference. “The AI has to be spot on.” That means it requires “extreme” computing power and a lot of code, Shapiro said. In the self-driving vehicle’s trunk are powerful computers and graphics processing units doing deep learning to parse all the data coming in — to determine such things as whether the object ahead is a person, another car, a fire hydrant and so on.

Even if it will take some time for fully autonomous vehicles to hit the market, AI is already transforming the inside of a car. Front-facing cameras can identify people in the vehicle and track the driver’s eye position to see whether he is falling asleep or distracted — and even read the driver’s lips. Sensors and cameras outside the car work with interior technology to enhance safety. For example, the car warns audibly that there is “cross traffic danger” if another vehicle is about to run a red light. It can also say things like “Careful! There is a motorcycle approaching the center lane!” to alert the driver in case he or she wants to do a lane change. “There’s going to be a whole host of guardian angel-type features even if we’re not fully self-driving,” Shapiro said.

Indeed, a major goal of self-driving companies is to make driving safer. Human error is responsible for 94% of car crashes, said Jeff Schneider, senior engineering manager at Uber and a research professor at Carnegie Mellon University. He noted that half of the mistakes leading to accidents were due to recognition errors — the driver was not paying attention or did not see something coming. The other half was the result of a decision error: The driver was going too fast or misunderstood the situation.

According to Schneider, self-driving vehicles can address these two types of errors. Problems of recognition would be mitigated by using sensors, radar, cameras, Lidar (a remote sensing system) and other tools. The cars can see 3D positioning of objects and other things around them, receive 360-degree camera views in high resolution and access other pertinent data such as velocities of objects. Meanwhile, sophisticated computing systems analyze the landscape to make the right driving decisions.

One way to help accuracy is by incorporating redundancy in the systems. For example, if a road sign were somehow obscured, measures are put in place to make sure the self-driving car does not get confused. Schneider said the car’s own map would inform it that there is a road sign at that location. Also, these vehicles go through enormous amounts of data to train them to operate under various conditions such as snow, rain, sleet and floods. Autonomous vehicle companies even use computer-generated conditions to train the car to drive through such things as a blinding sunset. “Using a rack of servers, we can generate over 300,000 miles [of driving] in just five hours, and test algorithms on every paved road in the U.S. in just two days,” Nvidia’s Shapiro noted.

To be sure, these are complicated tasks for the car. “Put yourself in the [position] of the person writing code” who has to account for people crossing the street, other cars on the road, billboards, traffic signs ahead and lanes for cars, bikes and pedestrians, among others, Schneider said. “You have absolute chaos.”

Safety and Security

To skeptics who see a fully autonomous vehicle as a pipe dream, it would be helpful to look back at how far autonomous vehicles have come, Schneider said. As early as the 1980s, Carnegie Mellon University’s NavLab project already was equipping vans with computers and sensors for automated and assisted driving. “It was the age of robotics when the rule was to keep the video running just in case something good happens,” he said. In 1995, the university’s “No Hands Across America” drive from Pittsburgh to Southern California was 98% autonomous and included a 70-mile stretch without human intervention, Schneider said.

To skeptics who see a fully autonomous vehicle as a pipe dream, it would be helpful to look back at how far autonomous vehicles have come.

In 2000, the university moved to off-road vehicles. The new things added to the roadsters were GPS and Lidars to make it easier to pinpoint objects and get around them. Seven years later, at the DARPA Grand Challenge, a contest for autonomous vehicles, a major development was the addition of good maps that provided a full reconstruction of the environment. “AI took a step forward,” Schneider said. CMU won the contest. It was also at this point that Google recognized the potential of autonomous vehicles and started its self-driving project, he said. Since then, AI, machine learning and deep learning have gotten even better.

Still, will consumers feel comfortable riding in a self-driving car? Based on Uber’s experience testing autonomous vehicles in Pittsburgh and Phoenix, Schneider said, the public seems to be open to riding in them. While there was some concern initially that people would be scared of these cars, “what we found was exactly the opposite,” he said. For example, since riders cannot choose a self-driving Uber, some customers would chase these vehicles while calling for rides in hopes of landing the car.

However, what could put a damper on the development of mass market self-driving cars is the business model. For now, it’s still more economical to own a car than take Uber everywhere. “If you just run the numbers, financially it’s not cheaper to do that than to own your own car,” Schneider said. “Once autonomous vehicles work and they’re everywhere … it won’t make sense to own a car.”

The Changing Face of the Corporate Bond Market

European Commission to launch public consultation on ways to improve market functioning

By Christopher Whittall

The European Commission wants answers to an intriguing question: Why is it becoming harder for people to trade corporate bonds, even though companies are issuing more of them?

The commission—the executive arm of the European Union—plans to launch a public consultation in early 2018 on ways to improve how the corporate bond market functions. Since the financial crisis, banks and investors have complained about deteriorating trading conditions in corporate debt markets, making it harder to buy and sell bonds in large sizes. Most analysts say that is because banks now hold fewer bonds as a result of the regulation that followed the financial crisis.

Brussels isn’t alone in its concern. The Federal Reserve Bank of New York and the Bank of England have also examined the bond market amid worries that declining liquidity could make it harder for big funds to sell positions in a downturn and trigger a self-reinforcing wave of fire sales.

Here are some charts that lay out the state of Europe’s corporate bond market, based on a study for the commission by consultants Risk Control Limited.

Markets-makers´ net inventories of non-financial European corporate bonds 

The commission will gather views from what it describes as a broad audience and will follow up on some of the 22 recommendations from a report published this week by a group of industry participants including banks, asset managers and European corporations. Those recommendations ranged from changes to banks’ capital requirements to amending the process around how companies raise money in bond markets.

The total amount of European corporate bonds outsatanding continues to climb

As the European corporate debt market has grown, the amount of bonds that trade regularly has declined by around 10 percentage points.

“The question is what would happen now if we go into another crisis period. The market has much less capacity than it used to have,” William Perraudin, director of Risk Control Limited, said.

The percentage of European bonds that traded*

* at least once a month during the month in question

Risk Control’s report revealed how reduced capacity has hurt the bank trading desks that act as intermediaries in these markets. Because they find it harder to unload bonds quickly, they are doing it less, crimping profits. It found that banks’ average holding period for bonds nearly doubled to around 35 days in May 2016 from 18 days in September 2011.

Bank´s average holding period for European corporate bonds is increasing

Net returns from bond trading have been on a downward trend in recent years, from a peak of 6% in late 2011, at the height of Europe’s sovereign debt crisis, to a trough of minus 9% in late 2015, when oil prices were tumbling.

Net return for market-makers of European corporate bonds