Kill the Death Tax
by Fred E. Foldvary, Senior EditorThe "death tax" is a tax paid on the property of a person who has died or on the transfer of such property. It can take the form of an accessions tax, which is an inheritance or gift tax levied on the heirs. Alternatively, it can take the form of a donor tax, such as an estate and gift tax levied on the estate of the deceased or on gifts made by the donor while he is living. The US federal government levies donor gift and estate taxes, which is what opponents are calling the "death" tax.
If there is an estate tax, it is logical to also have a gift tax, since otherwise people could give away their money before death and escape the estate tax. The US federal gift tax has an exclusion of $10,000, so you can give up to that amount to an individual per year without paying any tax. Gifts to nonprofit organizations are not taxed, and indeed are eligible for tax deductions.
Advocates of the estate and gift tax say that an inheritance is unearned income, and is therefore fair to tax. They say there is no economic disincentive, since it is a windfall to the heirs. Moreover, they say that the death tax is socially good, since it helps equalize wealth by preventing the build-up of wealth as it gets passed down the generations.
However, the estate tax does impose a disincentive to the giver. Many parents work hard not just for their own benefit but also to provide a legacy for their children. Parents not only want to provide for their children out of love, but also to fulfill the urge to immortality be leaving behind possessions which will be tied to their name and memory. This is especially so for farmers and owners of enterprises. Family farms are handed down over the generations, and the death tax can bring this legacy to a halt when the farm has to be sold to pay the estate tax.
The argument that an inherited estate is unearned overlooks the fact that once wealth is earned, it stays earned. If you earn $100 from wages and the give that wealth to someone, that $100 has still been earned, since its origin is labor. Whether the worker spends the earned wealth himself or gives it to someone else to spend is the worker's business. He may get pleasure from seeing somebody else spend it. So why punish the worker for choosing that form of spending his wealth? It is his money to begin with!
The argument for the equalization of wealth, carried to its logical conclusion, ends up in an income tax that leaves everyone with about the same income. The estate tax is an ineffective way of leveling wealth. The very wealthy can avoid much of the death tax by hiring lawyers and accountants to set up trusts, foundations, corporations, and various complex tax shelters. Corporations, trusts, and foundations are fictitious legal persons who never die.
Many of the large estates were built up from the rents obtained from real estate and natural resource such as oil. These rents are truly unearned, since the don't come from labor but from resources provided by nature and from the growth of communities. If it is just to collect unearned wealth, then policy should be directed to the origin of the wealth, not to its transfer.
If we want to reduce the inequality of wealth, and share unearned income, then the effective policy to do that is to collect and share the rent of land and other natural resources. These rents will then no longer build up into huge estates. Removing taxes on labor, capital, and enterprise will also help lower-income folks save and invest, and allow them to better build up earned estates. Using rent for government revenue rather than income and death taxes also eliminates the costly enforcement of these taxes, along with audits and invasions of privacy.
Unfortunately, politicians who are now calling for an end to the death tax are not also calling for a tax shift to rent rather than wages. So the elimination of the death tax will even further enrich those who benefit from great "real estates." However, while the death tax does tax some of the past rent, it does not provide the economic benefits of an on-going levy on land rent, namely encouraging a productive use of land, avoiding land speculation that moves the margin of production to less productive sites, which lowers wages and increases rent.
On balance, then, given the choice of eliminating the death tax or not, with no tax shift to rent, it would be socially beneficial to kill the deadly death tax. Families are the foundation of society, and if policy disrupts the deep biological urge to provide for one's children and leave a lasting legacy, policy then contributes to the breakdown of civil society. Those who earn wealth should be able to spend it as they wish. Death to the death tax!
-- Fred Foldvary
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Copyright 1999 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.