Government is so pervasive today that it creates a reality that most of us just assume is the natural order of things. One of the most frequent questions we are asked by people is: “if I receive an inheritance, do I have to pay income taxes on it?”
Another question usually answers that question: “Do you pay income taxes on gifts that you receive on your birthday or at Christmas?” I think not. An inheritance is no different than any other type of gift you receive. Government has not, at least as of this writing, had the nerve to tax gifts that you receive.
Tax policy is a blunt tool that is not very effective in promoting social engineering or a vibrant economy. Due to the pressures on politicians to curry favor with special interest groups that help to elect them, our tax code tends to distort rational behavior in the pursuit of reducing one’s tax bill. We often do things that are not in our economic self-interest in order to reduce our tax liability.
We are all familiar with the Financial Panic of 2008, which was precipitated by tax-deductible, low-quality home mortgage debt. Government policy subsidizes mortgage debt because officials believe that more people will own homes if government lowers the cost of loans with tax deductions. In fact, all this does is encourage people to take on more debt.
Canada escaped the effects of the Financial Panic in large part because they do not subsidize home mortgage debt. By not offering tax deductions for debt, homeowners are incentivized to pay down their debt, not lard on more of it as we do in the U.S. By the way, the percentage of the population that own homes in Canada and the U.S. is nearly identical.
No one likes to pay more than necessary when it comes to taxes. When you are making lifestyle decisions such as where to live or the size of your home, don’t let tax considerations dissuade you from what is really important in your life.