I took some grief for my position on death taxes. I am not surprised. The tax debate in America has been so cluttered with group-think there’s simply no way to stake out a position on taxes that does not get someone fired up. Liberals are supposed to be for high rates, progressivity, social engineering and fairness, whatever the hell that means. Conservatives are supposed to be for lower taxes, business incentives and different types of social engineering. Libertarians are supposed to be for no taxes and free weed.
The trouble here is none of those positions make any sense. The point of taxation is to fund government. The point of government is to address “common burdens”. In the Anglo-Saxon tradition, that meant military service, fortress work, and bridge repair. As human societies have become more complex and interdependent, the number of things considered “common burdens” has increased. Roads, schools, hospitals, parks and other things have all be put in that basket, requiring greater government and greater taxation.
The point here is there can be but one position on this aspect of taxation. That is, the tax rates must be sufficient to pay for the cost of government. Once you uncouple taxes from government services, taxes become theft. They may be lawful and commonly accepted theft, but they are theft nonetheless. That means the amount of tax is irrelevant. All that matters is what to tax in order to fund government.
How I come at it this is to ask which taxes have the least impact on the natural functioning of society? Road taxes, for example, are an attempt to peg taxes to usage. The more you use, the more you pay. That links the value of the road to the cost of the road. Ideally, taxes will have zero impact on the economic decisions of the people. That’s not always possible, but it should be the goal of tax policy. Otherwise, the impact of the tax could very well exceed the value of the tax.
An example of the latter is George Bush’s luxury tax on expensive toys. Rich people are not infinitely rich. The guy that could swing a yacht before the tax was priced out of it after the tax so he bought something else that was not subject to the tax, like stocks or real estate. Thus the tax was never paid, all the yacht workers lost their jobs and stopped paying income taxes.
That brings me back to the death tax. No matter how high the tax, there will never be a change in the mortality rate. It has been stubbornly fixed at 100% for years now. Experts predict it will remain 100% long into the future. That means confiscating all of the goods from the dead will not do much to change human behavior, at least in regard to dying.
Now, Joseph K makes what I think is the best argument against death taxes:
The estate tax is the single biggest cause of the rise and dominance of Progressivism in the 20th century. The formation by business magnates of massive charitable foundations in order to save their fortunes from government depredation created a massive slush fund for the financial support and promulgation of every lunatic Progressive idea in existence. Without the Ford, Rockefeller, MacArthur and other foundations, Progressive lunacy as we know it would not exist. Heck, PBS and Sesame Street, which poisoned the minds of innocent children with liberal dreck for generations, would not exist.
Taxation, particularly the estate tax, wrecked the landed aristocracy that ruled England for centuries, and which ruled half the earth for the better at its height, leaving a battered welfare state carcass currently being picked clean by the feral children of former colonial lands. One cannot call this progress.
There are a few things here. The first being that the rich will do crazy things with their money in order to avoid the tax. I’ll concede that point, even though I doubt that’s really what’s going on with these foundations. These are monuments to their own lives, in the same vein as monuments or great public buildings in antiquity. The royalty returning with booty from France in The 100 Years War built castles in honor of themselves, not to avoid taxes.
That said, the death tax could cause all sorts of behavior in an attempt to keep the fortune alive after the death of the plutocrat. That’s why I specifically avoided any discussion of exemptions. If you’re going to have a death tax, it must be 100% and universal – no exceptions. The use of insurance to mitigate the tax for businesses and family farms is not an exemption; it is private mitigation. Setting up foundations and trusts would not be exempt either. The money would have to be given away in life.
The other piece of his argument is that destroying the wealth of the rich has unintended downstream consequences. Toppling over the landed aristocracy, for example, opened the door for socialist lunatics to seize power. I’m not entirely sure about that timeline, but I’ll concede the greater point. Wiping out the rich through taxes is not consequence free and those consequences are not always known.
That’s why I specifically said the rich can give away their wealth before death. To quote myself,
“There’s nothing to prevent Bill Gates from giving his fortune away. He would just have to do it while he is alive. If he wants to set his kid up with a billion dollar gift, that’s his choice. That option exists now. Whatever is left upon his death will go to the government.”
The trouble with everything I’m saying here is summed up by juice.qr.
“what gets me is you make several points about how ‘if it such and such was implemented’ , ‘if it was done this way’ … problem is none of your brilliant fixes have been implemented, or are likely to be.”
That, I think, bookends Joseph K’s argument very well. Even if the defects of the death tax can be addressed, the people doing the addressing have insurmountable defects, primarily the fact that they are crooks, liars and lunatics. The death tax gives them the tools to inflict much wickedness on the people.
To sum up, I’m convinced that the death tax can never be done well and I’m open to the argument that a not done well death tax is way worse than other taxes not done well.
Old Milton Friedman comes out against the 100% death tax:
https://www.youtube.com/watch?v=MRpEV2tmYz4
Sometimes economists write of a “stock” being capital type assets and of “flows” as money flowing via trade. All gov expenses are a “flow” and probably should be based upon the “flows” of citizens rather than the “stock” or capital of the citizens. Death taxes are taxes upon the stock of the citizenry.
In addition, economists have studied the economic efficiency of taxation. There is some basic taxation that enables an economy to thrive such as rule of law over property, contract, defense, crime, etc. Of course we are way beyond such basics, and any taxation above that is a “deadweight cost” to the economy, i.e. economic activity is reduced more than the tax take. Those taxation efficiency economists have come up with various taxes causing more & less harm to the economy. I don’t recall the details & not worth the research to come up with as even if everyone here cheered the idea, we have no chance of prevailing. Anyway, the worst taxes for the economy are taxes on business, capital & labor. I don’t recall death taxes being included, but back to the stock & flow, I’m of the opinion, & I’m no economist, gov should not raise money to pay for its flows by taxing stocks.
I haven’t thought about it, but I do like Z’s idea about taxes causing the least amount of gov corruption & mischief. The least distortion has been covered though I can’t recall all the details.
The unasked question here is, do we want to fund, efficiently or otherwise, fairly or unfairly, the great portion of government which is inefficient, or worse, immoral. I do not.
The great unfinished argument which conservatives have long advocated is to argue for simpler and lower tax rates, because it increases revenue. Which it does. Then, when the argument is won over the shouting, increased revenue begets greater spending. Always. 1946, 1962, 1982. The booms bring out the progressives to spend the money because that door is left open. The legacy of Reagan is two Bushes, a Clinton and an Obama.
Bureaucracies which are useless or in fact causing positive harm: Education, Fatherland Security, Energy, Transportation, HHS, HUD, Labor, Commerce, and Agriculture. The EPA and the FDA are both a menace to citizens.
An efficient tax for this? First things first.
Thank you for the shout out, Zman.
As you point out, the purpose of taxation is to fund government; the tax rates must be sufficient for this purpose; and the tax should, ideally, have minimal impact, relatively speaking, on the natural functioning of society. These perfectly reasonable points, unfortunately, argue against the Death Tax rather than for it.
According to the folks at American for Tax Fairness(http://www.americansfortaxfairness.org/tax-fairness-briefing-booklet/fact-sheet-the-estate-inheritance-tax/), which should properly be called Americans for Communism, the Death Tax generated $8.5 Billion in revenue in 2012.
In the scheme of things, $8.5 Billion is nothing. The 2011 budget for the Dept. of Education, one of the most useless Federal agencies, was $69.9 Billion. The Federal government could save $8.5 Billion next year by switching to cheaper copier paper.
On the other hand, the downstream effects of the Death Tax are significant. Besides the calamitous societal effects I detailed earlier, there are major economic disincentive effects, as well as the large compliance burden. Contrary to your argument, I believe that the modern Death Tax imposes severe distortions on the natural functioning of the economy and the culture, without bringing much benefit in terms of revenue.
Of course, the modern Death Tax has never been about revenue, but about ideology, as cursory glance at the rantings of the rabble over at Americans for Tax Fairness will make clear. It’s all about “making the wealthy pay their fair share”; preventing the rise of a new aristocracy; and preventing “unearned wealth”. To state it more crudely, it is about ressentiment, envy, and punishment. The Death Tax is social re-engineering writ large on the backs of corpses.
Until 2001, when the plutocrat George W. Bush came to power, the Death Tax exclusion amount was under $1 Million, with a 55% top rate; after WWII that rate was as high as 77%. That is confiscatory, and highly destructive to asset heavy estates with minimal cash flow. That exclusion has risen over time to $5 Million+, with the rate at 40%. That is certainly more reasonable but, given what I’ve outlined above, why not just get rid of it? We actually did, in 2010, and the world did not end. Australia, Austria, Israel, Sweden, Canada, and other nations have also abolished the Death Tax.
The Death Tax has a long history, going back to the Roman Empire, but the rate was low, under 10%, and immediate relatives were often excluded from the tax. In these aristocratic societies, the wealthy governed and contributed to the commons, but made sure not to destroy themselves in the process.
That era is long over. The Death Tax has been hijacked by ideology. When that happens, the rot has set in. The only beneficiary of the Death Tax is Liberalism. Time for it to go.
Does anyone know if John Kerry has paid his yacht tax to Mass. yet? Has Al Sharpton paid his back taxes yet? We had a Sec. of Treasury that failed to pay taxes. I guess for the ruling elite taxes are optional at best, but the rest of you better cough it up and now or the tax man will get you. Give unto Caesar…….
“These are monuments to their own lives, in the same vein as monuments or great public buildings in antiquity.”
I’d prefer touring Crazy Ludwig II’s replica of Versailles or the Biltmore estate to attending a Bill Gates malaria lecture (replete with a jar of mosquitoes)or a global warming conference.
Old school money, left to their own self interests, made (are making) timeless contributions to art and history, or in the heirlooms that can be passed on to relatives, or to investment in the next generation of technology and/or commerce. “Foundations” seem to follow popular dead end fads.
Do you believe in private property? At what point do I own something that is beyond the province of the state? A dead man’s estate should be the penultimate of “after tax income”. You’re still free to tax any further economic activity from his assets, i.e. the sale of a lost Picasso grandpa bought at a garage sale. Why does an heir have to pay a tax to merely inherit these options?
Bryan, I think you are conflating some things with regards to taxes. The fairness of a tax is not something I’ll spend much time debating. Fairness is entirely subjective. Societies figure out what they think is fair and it varies from place to place. Similarly, the proper level of taxation is not particularly interesting to me. As I said, the amount of tax is determined by the amount of spending. If the public wants a big fancy park with lots of rangers to keep it nice, then they have to pay the taxes for it or cut spending for some other thing government is doing.
For me, the question with regards to taxes is efficiency. Which taxes cause the least amount of distortion, corruption and mischief.
With regard to private property, that horse left the barn long ago. In America, the state owns your property. You temporarily possess it at the discretion of the state. Once we banned private association, we banned private property, for all practical purposes. Once we made “the environment” the public domain subject to government regulation then we lost all of our property rights, even ownership of ourselves.
We live in a neo-feudal society.
Dear Z man,
Me thinks you are walking back your death tax proposal.
You need a third posting to get all the way back to sanity.
Dan Kurt
Thrasymachus gets to the crux of the issue. An estate tax such as you describe will, over time, destroy capital formation.
Asset accumulation is a family enterprise, not an individual one, that continues over generations. Assets produce income, which can be taxed. If assets are taxed, the government gets the value of the asset, but loses the stream of the revenue that the asset would have provided.
Every tax has advantages and disadvantages, but the estate tax and the means people use to avoid it create serious distortions. The real intent is to prevent people from having “unearned” privilege.