Soak the Dead
Senate Democrats succeeded in June in preserving the estate tax. To assess this outcome, first some facts.
The IRS website reports that before 2004, only estates worth more than $1 million were subject to the tax. In 2006-2008, only estates worth more than $2 million will be taxed. Most estates are smaller than these thresholds, and some estates carry exemptions, so only about 2% of estates are subject to the tax. According to the BBC story above, the estate tax is projected to raise about $1 trillion over the next decade.
Philosophical arguments about the estate tax:
- (con) Double taxation should not be allowed. People are taxed on their income when they earn it. After the remainder is received, it should be free and clear.
- (pro) Resources should be earned, and kids have not earned their parents’ wealth.
Economic arguments about the estate tax:
- (con) Saving promotes economic growth, and most standard analyses imply capital should not be taxed. Thus estate taxes, which reduce the returns to capital accumulation, ought to be eliminated.
- (pro) Without estate taxes, inequality can grow without limit.
- (pro) Estate taxes motivate (tax exempt) charitable giving.
- (pro) Estate taxes, which are only incident upon the extraordinarily rich, have only minor consequences for their wealth accumulation: people with taxable estates are so rich that their saving is driven by much more than the bequest motive.
- (pro) The marginal utility of wealth to the extraordinarily wealthy is much lower than the marginal utility of wealth to the typical individual in society. Estate taxation is a great way to redistribute.
- (pro) People with estates subject to tax will be able to escape some of the taxes anyway by making gifts during their lifetimes and setting up trusts and other tax shelters.
On balance, estate taxation is very compelling for philosophical and practical reasons. It justly implements the principle that wealth should be earned. And the freedom it takes from the dying is less than the freedom it creates for others through efficient redistribution.
In fact, the inexorable conclusion for me is that justice and freedom would both be best celebrated by extremely high estate taxes. Since this way of playing Robin Hood is so economically sensible, in a utilitarian sense it is a brilliant way to expand freedom. And since equality of opportunity is so obviously enhanced by taxing transfers of wealth, in a philosophical sense it is a brilliant way to expand justice. When I think about estate taxes my ultimate question is: Why shouldn’t we raise estate tax rates to 100%?
