Confiscation of Inheritances?

We reproduce the weekly column published by attorney Esteban Torres Cobo in the written press.

The latest presidential announcement regarding the future inheritance, legacy, and donation tax in Ecuador is surprising. Not because it is new — with so many new taxes, we have already lost our capacity for surprise — but because it sends a negative and dangerous message at a delicate moment for our economy.

There is one striking figure that stands out when looking at the tax calculation table: 77.5%. Yes, our country has now reached the point of having a tax that would take, for the State, 77.5% of an Ecuadorian’s wealth. Something unprecedented, as I understand it, since the beginning of our republican life in 1830.

And many will say, quite rightly, that they will never have to pay that amount and that it does not matter because only the extremely wealthy will pay it — those who receive more than USD 849,000. They may fall within the 2.5%, 7.5%, or, at most, the 17.5% bracket. But they forget that our legislation would already include taxes of 32.5%, 52.5%, and 77.5%. And that is dangerous. Even more so in the case of a tax that, by economic logic, should never have existed.

Ludwig von Mises, the great economist of the Austrian School of Economics, said that the discriminatory system of taxation, universally accepted under the misleading name of progressive income and inheritance taxes, is not a method of taxation but, on the contrary, a disguised form of expropriation.

Another great economist from the same school, George Reisman, went even further and explained, through his own story, how he, as a university professor without great wealth, benefits when the wealth of the richest people — and of anyone else with some money, whether inherited or earned from scratch — remains in their hands rather than passing to the State in the form of taxes.

As someone who earns a modest monthly salary by teaching, he buys products and sells his labor. The supply of the products he buys and the demand for his work as a professor depend on the amount of capital invested in the society where he lives. The more capital is invested, the more goods will be produced and at better prices. At the same time, the demand for his services will be greater, and he will be able to earn a better salary.

This means — in his words — that an inheritance tax harms him because it causes money that could otherwise be used for capital investment in his own immediate environment to disappear into government spending.

I also ask you: what message is being sent to private investment? Who could find Ecuador attractive for generating wealth when, among other taxes, there is one that screams 77.5%?

© Article published in Diario El Heraldo on Sunday, May 31, 2015.