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The End of the Inheritance Tax? J. Bradford DeLong delong@econ.berkeley.edu http://www.j-bradford-delong.net/ June 2000 691 words On June 9 the Republican-led House of Representatives voted to repeal the estate tax. Estate-tax repeal will surely be vetoed by the president this year, but perhaps it will not be vetoed next year. When George W. Bush, campaigning in Iowa, declared that he "support[ed] getting rid of the death penalty," he was not saying that Texas should stop executing people because it was not clear that all those on death row were guilty of first-degree murder. He was saying that it was unfair that in the next decade those who leave estates of more than $1,000,000 would have to pay two-fifths of the excess to the federal government in estate taxes. It would be fairer to have no estate tax at all--and thus, relative to our current system, give an average present of $3.5 million each to the heirs of the 2,400 people who die each year leaving estates of more than $5 million. So why is it a high priority of both the Republican Congressional leadership and the Republican Presidential candidate to repeal the estate tax. Why is it a high priority to give another tax break to the rich. Why is it a high priority to remove an obstacle that keeps the rich and powerful of one generation from ensuring that their grandchildren have--unearned--relative riches and power as well? Earlier generations of Republicans would be astonished. It was Abraham Lincoln who said that the great thing about new America as opposed to old Europe was that in America wealth, power, and influence were not inherited: by and large Americans did not work for landlords or bosses but worked for themselves, and "the man who labored for another last year, this year labors for himself, and next year will hire others to labor for them." Andrew Carnegie, a principal funder of the 1900-era Republican Party, put it more bluntly: "he who dies rich dies in disgrace." Accumulated entrepreneurial wealth was a public trust to be used for public betterment--hence the Carnegie libraries, endowments, buildings, and universities scattered over America. Accumulated entrepreneurial wealth was not--or so Carnegie thought--something that could be morally used to give your descendants a cushy life. But all this was in centuries past. Back then America was a place--in theory at least--where people made themselves. Who you were depended on what you had done, did, and were going to do. It was--in theory at least--different from Europe, a place where who you were depended on who your daddy was. The foundation on which America was--in theory--to be built was the principle of "equality of opportunity." And back then solid obstacles to the intergenerational transfer of wealth and power made sense: if there is to be an upper class let it be made up of those who have been skillful and lucky in their deeds, not of those who just happened to be born in the right household. But now it is a new century and a new millennium. Now it is a legislative priority of the Republican Party to eliminate the estate tax. Now the Republican Party has a standard bearer who thinks that it of all the forms of unfairness in American life one of the most unfair is to keep someone from squeezing every single ounce of advantage out of one's daddy's position and accomplishments. "Fairness" no longer means "equality of opportunity." If this Republican tide does sweep over the country, and if "fairness" does come to mean that it is fair for the children of the rich and powerful to stay rich and powerful, I for one will be sad. It was never the case that opportunity in America was as equal as our civic religion proclaimed. But it was always the case that America was a special place because of universal agreement that inequality of opportunity was unfair. If this Republican tide does sweep over the land, there will still be a country called "America." But that country will lack much of what made America special, and lovely.

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I have some sympathy for antagonism to inherited wealth and yet I think there is more to the story than that. You say that inherited wealth would make this country a land of inequality, not like to pioneer days -- but the opportunity was much greater in frontier days, since the frontier itself provided opportunity.

A better argument would concern the benefit the state (government) is giving to the inheritor. It is the government that insures that orderly succession in ownership and control is given to the heirs of a death. This service to the heirs is worthy of some charge by the government. Since it is a trivial activity (in terms of ensuring, the actual cost of transfer is paid by court fees) to transfer "small" estates, the only charge would be for "large" transfers. This would establish the principle that a person's property belongs to him and should be disposed of by him, while maintaining the principle that services should be paid for.

Consider, instead of the flat death tax ( tax on the estate), a tax on inherited wealth above a certain level. This corresponds to the fact that it is harder to care for a lot of money than a small amount. It also reflects the fact that the power involved in a large amount of money is significant and the state definitely has an interest in the distribution of power among its citizens. A very wealth person, a Bill Gates, would be able to avoid taxes on his estate, but only by distributing among a very large number of people. On the other hand, if he considered it important for some reason to continue the concentration of his wealth, perhaps to retain control of his company among his relatives, then he would assume ahead of time the need for them to pay the tax on what they are inheriting.

The level of not taxes inheritance and, perhaps, the rate of progression would then be the subject of debate and not the desirability of confiscastion of someone's wealth.

I would suggest that taxes start at an inheritance of $5 million (where true wealth starts); that progression proceed at the square of the number (5, 25, 225, etc); and the rate start at 10% and double with (and for) each progression.

I appreciate your thoughts, they make me think even where I don't agree, as with this one!

Contributed from 24.6.249.56 by Art Bolstad (holycross@email.com) on September 1, 2000.

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I've enjoyed reading your columns, but this one really touches a nerve. I can't understand why on earth people think this is fair or right. Your essay is well argued and makes a persuasive case.

Contributed from 24.6.249.56 by Ken Rose (kenr@cisco.com) on September 1, 2000.

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I agree with the logic and sentiment of this Message. But I have a suggestion, your reaction to which I am eager to know.

The main objection to mega-estates is that mega-fortunes constitute economic power. Having mega-fortunes is all right as long as the mega-fortune has been earned in a legal (and therefore presumably in a socially useful) manner. But inheriting gigantic economic power by an incompetent heir can cause genuine social harm and is no more defensible than inheriting, say, a supreme court judgeship or an army generalship.

On the other hand it is not possible to abolish inheritances altogether. This would run counter to the strong human instinct of helping one's offspring as much as socially acceptable.

My compromise suggestion is that there should be a lifetime inheritance limit of (inflation-adjusted) $ 1 million per person. This would guarantee an (inflation-adjusted) income of $ 40,000, even if the inheritor would choose to live a completely idle life, provided the inheritor invests it in Federal Treasury real return bonds. This income would be pretty close to the median per capita personal income of the USA. If a billionaire wants to leave 1 million each to 1000 persons just to "cheat" the Treasury of the estate tax, let him. The incompetent inheritor of a million cannot do much social harm with such a small amount.

What are the arguments against such a proposal? Would it be too difficult to administer?

Contributed from 24.6.249.56 by Tom and Alina Schweitzer (tschweitzer@ilap.com) on September 1, 2000.

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What made America beautiful was that it was the
land of the free and the brave. The wealthy
should be free to choose what they do with their
money whether that be philanthropy or hoarding
it. There are great philanthropist today just as
there have been in the past. The Government
taking 40% of an estate is forced philanthropy,
what kind of freedom is that? Certainly not the
kind that Abraham Lincoln or Dale Carnegie would
have approved of. Repealing the estate tax is a
gift? What a load of horse shit. The wealthy
population that you seem to despise pays the
lions share of the taxes in this country.
Remember that when taxes are raised, theirs is
raised right along with everyone elses. When it's
lowered it should also be lowered with everyone
elses. You can keep your socialism, certainly
that is not what has made this country great.

Contributed by AlexTaylor1@hotmail.com (Alex Taylor) on March 14, 2001

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All the comments I have read on this page treat the issue of the estate tax as some sort of moral imperative. Might I suggest that when one starts to treat economics as morality (whether communist or not) the results are uniformly unpleasant.

I would argue that the issues with the estate tax are not morality but the effects. These are at least two-fold. The first is the question of revenue. Does the estate tax generate a substantial amount of revenue for the Treasury, and what would happen if it were abolished? I can't comment either way, but I would say that the issue is richer than comments here suggest. In particular, while it certainly is so that the extremely wealthy have "dodged" the estate tax in some fashion by establishing charitable foundations, pretty much anyone familiar with the subject would agree that learning in the twentieth century is immensely better off as a result of money from foundations that has gone to conferences, scholarships, equipment grants etc. This would argue that there are some very definite, albeit perhaps intangible, benefits to the current scheme of both an aggressive estate tax and the allowing of charitable foundations.

The second aspect is what will be the ultimate social consequences of repealing an estate tax? Naturally they will be to enlarge an already extreme gap between the rich and the poor in the US. One does not have to be a Marxist to believe that beyond a certain point, a large enough gap between rich and poor leads to a dangerously unstable society (vide Columbia right now). The US has been largely free of the social strife that plagues the rest of the world because there has been a perception that the deck is not too viciously stacked against the average person. Fifty years of a combination of the current money based politics and a very obvious increase in inequality of wealth distribution will end that. I would ask every wealthy person supporting this repeal: "Is it worth being able to leave your child twice as many millions, when as a byproduct, you will NOT be able to leave them a United States like the one in which you grew up, but rather a United States like India or South Africa, based on gated communities and the naked display of force by the rich, a United States in which, every day, they will live in fear that (for example) their children have been kidnapped?"

Contributed from 17.202.32.93 by Maynard Handley (handleym@ricochet.net) on July 25, 2000.

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