Estate tax as income tax

I just finished reading an article recommended by Richard about the estate tax, titled “Death and taxes“. It appears in New Statesman, a UK magazine “created in 1913 with the aim of permeating the educated and influential classes with socialist ideas.”

I’m glad I read the article in full before reading the magazine’s history, as it would’ve no doubt coloured my impression. The article refers to a John Rawls’ idea that would revolutionize estate taxes:

… hence inheritance tax could be made progressive, through orienting it towards receivers rather than donors. Large estates need not attract any taxation, as long as they were dispersed among a number of relatively disadvantaged recipients. At the same time, even small estates could be taxed heavily if they were all left to others who were themselves already wealthy.

I love this idea. Will it be implemented though? Most political discussion of the tax revolves around scrapping it or keeping it. It will take leadership to steer the discussion towards reorientation the likes of which Rawls suggests.

The article defends the estate tax on a number of points, but the free market one resonated with me most, which is no big surprise:

A free market in trade and employment gives us, let us suppose, a dynamic, innovative and thriving economy. It does this by incentivizing hard work, and letting economic rewards flow to those with the best ideas and the greatest capacity for hard graft.

But, if this is our vision of society, we surely must admit that the unearned windfall gains of inheritance tax distort this picture. Large inheritances distort the level playing field which would allow the dynamic and innovative to prosper.

Turning the estate tax into a income tax on the recipients would certainly shake things up, potentially improving the competitiveness of the economy while preserving the source of progressive government revenue. We should give it a shot, but the political will has to be there.


Why the estate tax is a good thing

You can count on only two things in life – death and taxes. Actually, more like two and a half things, because there is also taxes upon death. The estate tax raises revenue by taxing the wealth people leave behind when they die.

That’s a good thing. If we could, I would suggest only taxing dead people. Dead people can’t complain about all the taxes they have to pay. The people who complain about the estate tax are the people who inherit less because of it.

The Tax Foundation has a recent blog post in which they again try to attack the estate tax. They link to a “provocative new study,” in their words, that

“undermines a central argument made by proponents of the estate tax: that it helps reduce the concentration of wealth in the economy.”

Seems to me that if estate taxation fails to reduce the concentration of wealth, that would be a reason for opponents of the tax to pipe down, not up.

The study: “It is commonly assumed that inheritances are a major source of wealth inequality and that the offspring of wealthy families tend to be as rich as their parents due to bequests.” Dude, I don’t need to assume that – I see it every day. That’s not an assumption, it’s a plainly undeniable fact.

“For most estates larger than $5 million, the effective tax burden is only 13.5 percent to 17 percent of estates; in fact, the burden tends to fall primarily on smaller estates.”

Well, heck, if the small-fries are getting hit the hardest, why are the big guys so up in arms? If the rate is so darn low, what’s the problem?

As far as I’m concerned, as long as we’re still primarily raising revenue by taxing income, capital and property value (all very flawed methods), we might as well keep taxing dead people.


Buffett donates fortune to charity, is accused of avoiding estate tax

A few days ago, super-investor Warren Buffett announced he would be donating the majority of his considerable assets to Bill Gates’ Foundation, and he’s been rightly commended in the media for his generosity.

But for some reason, the ordinarily smart-minded folks at the Tax Policy Foundation have a bone to pick with Buffett over his support for the estate tax:

Warren Buffett has famously campaigned to keep the federal estate tax, but he apparently will avoid the tax himself, despite owning the world’s second largest personal fortune. Advocates of estate tax repeal were cynical but not surprised by the announcement that Buffett would avoid the tax that he has helped protect. They have long contended that the largest fortunes usually escape the so-called death tax.

I’m dumbfounded that a blog which I’d previously held in high regard would go out of its way to make such ugly remarks about one of the most benevolent acts in recent history. I’m also confused as to why the author believes Buffett’s estate should be taxed on wealth that will never be property of an estate.

Buffett ain’t dead yet, so why would his (non-existent) estate be taxed on charitable donations? Talk about putting the cart before the horse.

I shouldn’t be so surprised. The blog strongly favors repealing the estate tax.

I’m ordinarily a staunch supporter of our neighbour to the south – I’m half-American myself – but the estate tax needs repealing like I need my root canal redone. Except that I actually do need my root canal redone. I guess that wasn’t a great analogy.