A 100% Estate Tax?

All taxes are distortive, but some are necessary. Most people agree that governments provide many useful services, but there’s plenty of disagreement about how to pay for them. In the USA we’ve mostly settled on a combination of income1 and (depending on your state) sales and property taxes to fund the government. There are some other minor revenue sources (customs duties, gasoline tax) but that’s basically it.

One thing we don’t tax is inheritance2. This seems like a bizarre omission to me. Given that we have to tax something, it is far more reasonable to tax inheritance – which is almost by definition an unearned windfall – in preference to income, which is in contrast very much earned, and something that public policy should be trying to promote, not discourage3.

One obvious reason why we don’t tax inheritance is that an inheritance tax with teeth would be hard to implement practically. There are a lot of ways to distribute wealth to your loved ones without it showing up on a balance sheet, such as selling the family farm or dental practice to your daughter for a far-under-market price, or less directly by footing the bill for an elite education that can pay social and economic dividends for a lifetime. So an effective estate tax would probably need both statutory and cultural components. Its efficacy would rely in part on a broad social consensus that favoring your own heirs “too much” is a shameful abrogation of the social contract.

Fundamentally, implementing a strong estate tax is a move towards an increased equality of opportunity, something that the political right and left both claim to support. By interrupting the current status quo of quasi-dynastic intergenerational wealth transfer, young people of whatever background will be able to compete on a more even playing field for the best jobs and distinctions. Obviously being born to rich or powerful parents will always be a huge boost for both material and intangible reasons, but tempering that advantage to a degree would be a good policy.

On a personal note, I grew up in a reasonably wealthy household, and the leg up I’ve already been given as a direct result of my parents’ economic situation is far greater than I could have expected or deserved. It feels deeply unfair that I’m also presumably in line for a modest-sized sum in the (far-distant) future when my mother passes away. In contrast, a dear friend of mine who enjoyed no such privilege in her early life is already supporting her parents economically and will, if anything, inherit their debts. As much as any economic argument, a strong estate tax appeals to me because it just feels fair.

There are real political and psychological barriers that make strengthening the estate tax in the USA a difficult proposition in the short term. But as income inequality grows and the political pendulum continues to swing, it seems inevitable that at some point in the future a progressive government will come to power with a political mandate for implicitly or explicitly redistributionist policies. When that time comes, I hope that a stronger estate tax is considered as a serious option.

  1. also payroll tax, which is just an obfuscated income tax.

  2. when lower than $11M for individuals/$22M for couples, raised in the latest tax bill from the already laughably high $5M/$11M previous levels.

  3. It’s a nearly universally accepted economic principle that when you tax an activity people do less of it. So taxing income (production) creates a drag on the economy by disincentivizing productive work. There’s a vigorous debate about the degree to which this is true of income specifically, but nost economists would agree that taxing it isn’t actually a good thing for the economy, except insofar as we have to tax something and it’s a relatively easy thing to measure and tax.

Published on April 25, 2018

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