From Art Laffer, economist and inventor of the Laffer Curve, comes an excellent and timely piece explaining why we should all care about the death tax, its effect on society and on people's behavior: Spend it in Vegas or Die Paying Taxes
President Barack Obama has proposed prolonging the federal estate tax rather than ending it in 2010, as is scheduled under current law. The president's plan would extend this year's $3.5 million exemption level and the 45% top rate. But will this really help America recover from recession and reduce our growing deficits? In order to assess the pros and cons of the estate tax, we should focus on its impact on those who bequeath wealth, not on those who receive wealth.
Advocates of the estate tax argue that such a tax will reduce the concentrations of wealth in a few families, but there is little evidence to suggest that the estate tax has much, if any, impact on the distribution of wealth. To see the silliness of using the estate tax as a tool to redistribute wealth,
realize that those who die and leave estates would be taxed just as much if they bequeathed their money to poor people as they would if they left their money to rich people.
So, the death tax is ineffective. Yet its supporters claim that the idea is worthy nonetheless. Laffer shows that this, too, is a ridiculous bunch of nonsense.
Indeed, from a societal standpoint, inheritance is an unmitigated good. Passing on to successive generations greater health, wealth and wisdom is what society in general, and America specifically, is all about. Imagine what America would look like today if our forefathers had been selfish and had left us nothing. We have all benefited greatly from a history of intergenerational American generosity. But just being an American is as much an accident of birth as being the child of wealthy parents. If you are an American, it's likely because ancestors of yours chose to become Americans and also chose to have children.
In its most basic form, it's about as silly an idea as can be imagined that America in the aggregate can increase the standards of living of future generations by taxing individual Americans for passing on higher standards of living to future generations of Americans of their choice. Clearly, taxing estates at death will induce people who wish to leave estates to future generations to leave smaller estates and to find ways to avoid estate taxes. On a conceptual level, it makes no sense to tax estates at death.
But the silliness of the idea doesn't prevent the class warriors from repeatedly clinging to an idea born to fail. So desirous are they of out-and-out class hatred, that they even ignore the obvious effects the death tax has on the behavior of any thinking person.
Study after study finds that the estate tax significantly reduces the size of estates and, as an added consequence, reduces the nation's capital stock and income...
Today in America you can take your after-tax income and go to Las Vegas and carouse, gamble, drink and smoke, and as far as our government is concerned that's just fine. But if you take that same after-tax income and leave it to your children and grandchildren, the government will tax that after-tax income one additional time at rates up to 55%. I especially like an oft-quoted line from Joseph Stiglitz and David L. Bevan, who wrote in the Greek Economic Review, "Of course, prohibitively high inheritance tax rates generate no revenue; they simply force the individual to consume his income during his lifetime." Hurray for Vegas.
If you're rich enough, however, you can hire professionals who can, for a price, show you how to avoid estate taxes. Many of the very largest estates are so tax-sheltered that the inheritances go to their beneficiaries having paid little or no taxes at all. And all the costs associated with these tax shelters and tax avoidance schemes are pure wastes for the country as a whole and exist solely to circumvent the estate tax. The estate tax in and of itself causes people to waste resources.
There is much more to read here on the evils of the death tax, but I'd like to close with his argument to those who say that most people won't ever save enough money to have to pay it. Obviously, that is no reason to cling to a disastrous policy.
To counter the fact that economists such as I obsess about the deleterious effects of the estate tax, advocates of the estate tax note with some pride that 98% of Americans will never pay this tax. Let's make it 100%, and I'll get off my soapbox.
Aside from the fact that it should seem immoral on its face to tax someone for the act of dying, this piece makes clear that all tax issues can be easily understood by using common sense. Ask yourself what most people would do if faced with a certain tax. Ask yourself what other options are available to the person who wishes not to pay the tax. Ask if the tax rate is sufficiently high that many people are going to be unhappy to pay it.
Draw reasonable conclusions, and then you will understand that no behavior should be taxed beyond what the majority of its payers would deem reasonable and acceptable, unless you want to eliminate that behavior or force a thriving black market to spring into existence.
The death tax, especially at its current egregious rate, stands no chance of holding up to either morality or common sense.
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