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  • Politics of the Estate Tax

    Posted by Jonathan on April 15th, 2005 (All posts by )

    Glenn Reynolds speculates about declining political support for the death tax:

    I think that one difference may be that society does less to “make it possible” for people to get wealthy now. A hundred years ago, or even fifty, the politics of inheritance taxes were different. But then the government mostly defended the country and engaged in various public-good activities, like building roads or supporting research. There was pork, and income transfer, of course, but it was a much smaller part of the picture. So the notion that one was “giving back” to a system that made wealth possible made some sense.

    He’s right, but it’s worse than that. Modern government not only transfers wealth on a grand scale from one group to another, it seeks to make the accumulation of wealth much more difficult in the first place. A quick calculation of how many marginal dollars one has to earn in 2005 vs. 1900 to accumulate an additional dollar of after-tax estate value makes clear how much harder it is now. (And that calculation considers only explicit taxes, not the many regulatory and legal costs — licensing, zoning, environmental regulations, safety regulations, EEOC regulations, lawsuits, etc. — that didn’t exist in the past.) From the perspective of many people who are actually trying to create wealth, government is the enemy. The way to make things better for everyone is to reduce disincentives to wealth creation, not to punish further those who are successful enough to run the government’s gantlet.

    Leftists who write things like “fuck the small businessman” would do well to ask themselves where our society’s wealth comes from. It comes largely from productivity gains based on capital investment. Inheritance is traditionally an important source of such capital. Taxing inheritance reduces the capital stock, because government won’t invest it as effectively as family will, and because productive people have less reason to work hard, save and invest when they can’t share their wealth with their heirs. It’s also wrong to confiscate people’s property.

     

    10 Responses to “Politics of the Estate Tax”

    1. Richard Heddleson Says:

      Would this affect the savings rate?

    2. Robert Schwartz Says:

      Another thing is a purely tactical issue that estate tax proponents messed up.

      The estate tax makes a certain amount of sense in the context of a progressive rate income tax, in that it (along with the gift tax) prevents taxpayers from gaming the system by means of asset transfers.

      Unfortunately the estate and gift tax rate structure got way out of wack after the 1986 revision of the income tax. At that time maximum income tax rates dropped from 70% to under 40% but estate and gift tax rates remained at 55%.

      The correct system would have been to reset the gift tax rate at the maximum income tax rate and the estate tax rate at G/(1+G) where G is the gift tax rate. I.E. if the current maximum income tax rate is 35%, the gift tax rate should be 35% and the maximum estate tax rate should be about 26%.

      Thus, if there were no transfer, the maximum rate taxpayer would pay $35,000 in taxes on the receipt of $100,000 of taxable income. In order to discourage the use of gifts to transfer income tax liabilities to low rate tax payers, the gift tax on the transfer of $100,000 would be $35,000. Since the donor pays the gift tax and there is no gift tax on the gift tax, the equivalent of the same transfer in an estate would be a tax of $35,000 on a net estate of $135,000 or 25.9% of the estate.

      Unfortunately, estate tax proponents thought that the purpose of the estate tax was to punish the rich, not to raise revenue. Their logical response to calls for abolition should have been to lower rates. Instead of making that response, which might have diffused the repeal movement, they campaigned for the tax on the grounds of distributional justice.

      Redistribution has never been argument that appealed to most Americans, Reynolds gives one reason for it. Another might be that Americans are not jealous, they are hopeful. Further there is something to be said for the idea that the preservation of private property from confiscatory taxation is a benefit to everyone who has or hopes to have ANY property.

      Note that the repeal does not repeal the gift tax, which shows how fundamentally unserious it is.

    3. David Foster Says:

      I wonder why Matthew Y used the initial line about the small businessman. He could have made the same argument without such a blatant demonstration of hostility toward a whole class of people.

    4. Jonathan Says:

      Robert,

      Excellent observations. Thanks for sharing them.

      This is something that W understands completely but the Left still doesn’t get. It’s a bit different than the ownership-society meme (itself a great idea): as a matter of practical politics you will achieve more of your goals if you can convince a large number of people that the government isn’t out to screw them.

      The Left, which is so closely aligned with stasis and so reflexively hostile to entrepreneurial wealth-building, cannot bring itself to support any program that doesn’t screw people who make a lot of money. Thus leftists support the death tax at confiscatory levels even though it probably generates little or no net revenue for the government. If they were really out to maximize revenue they would want the tax rate set at a low enough level that it would not encourage avoidance. Their insistence on keeping a high and punitive rate makes clear that they are still driven by envy and a desire to punish successful people.

      I don’t think the Left has a chance of becoming politically dominant again in this country unless it drops its insistence on punishing success. That this is true appears to be obvious to everyone but leftists themselves.

    5. David/California Says:

      Interestingly, this is an argument about methods more than results. According to at least one study, only one family fortune in three survives the second generation, and only one in eight survives the third. The others are lost by the family and returned to the economy. The probability is therefore that, in a few decades, even more of the money than the estate tax confiscates will be released back to the economy and contribute to new fortunes – it just won’t go through the government’s sticky fingers.

    6. Jonathan Says:

      David Foster,

      I don’t know why Yglesias expressed hostility to small businessmen. Maybe he is hostile to them. Remember how, back in 1994, Hillary Clinton said “I can’t be responsible for every undercapitalized small business in America”? I remember it. It was a clear expression of hostility and contempt. It’s the same attitude that Yglesias has. His statement probably didn’t come out of the blue.

      David/CA,

      It’s true that fortunes tend to dissipate even without government intervention. However, it doesn’t follow (not that you argue that it does) that confiscation of wealth by government is morally OK. Justice and right and wrong are matters of process, not results — e.g., the possibility that I may waste my money and end up with nothing does not justify your taking my money before I can waste it.

    7. David Foster Says:

      Yes, I remember Hillary’s comment well, and I’ll bet a lot of other people do, too.

      Aristocracies have long had a contempt for those who were “in trade”…I suspect that many leftists consider themselves as part of an aristocracy, and have adopted this viewpoint.

      Interestingly, though, many of the leftists with such attitudes seem to themselves be products of inherited wealth.

    8. Ginny Says:

      As a somewhat incompetent businesswoman that nonetheless was making sure that 15-20 people got their paychecks every couple of weeks despite the shoestring (undercapitalization) I remember it well. It was one more prod to get me where I belonged, on the right. Not only was I making a fraction of what she had made from the day she got a cushy job out of college because some people correctly thought her husband would go far in politics (and I had more education, of course, than she) but, my incompetence aside, there was that payroll. Who the hell provides job instruction and a kind of entry into the skills of the work world but those undercapitalized small Mom & Pop shops that nag, push, praise, sympathize with those kids learning to get to work on time, be polite to customers, etc.

    9. Robert Schwartz Says:

      The left has always hated the petit bourgeoises. Its part of their heratige from the upper classes, whom they oppose but admire. The middle classes are their enemies and the left has no admiration for them, only disdain because they dirty their hands with commerce.

    10. David A. Fauman Says:

      F. Furet pointed out that the Nazis and the Communists had a common enemy-the property owning middle class. This was why Hitler and Stalin had no trouble understanding each other.
      This hatred goes back to the French Revoltion and is at the heart of all collectivist ideologies. The despisers of the middle class are often eaters of wealth not makers of it.