Wealth, Mobility, Inheritance And The Estate Tax

Studies | Taxes

No. 235
Thursday, June 01, 2000
by Bruce Bartlett


Conclusions

The fundamental justification for estate taxation is that great private wealth is per se socially undesirable. A secondary rationale is that inherited wealth is undeserved and perhaps even harmful to the recipient. Hence, high estate taxes are good for society and, perhaps, even for those who would otherwise be corrupted by inheriting unearned wealth. Hardly anyone argues that great private wealth is good for society. Yet unless that case is made, those seeking to abolish the estate tax will be vulnerable on their flank. Ultimately, the case for abolishing the estate tax must rest on a belief that failure to allow for the accumulation and free disposition of great wealth is bad for society as a whole.

To be sure, the wealthy have always suffered from bad press. In many cases, this was justified. Historically, great wealth has only been accumulated by royalty or aristocrats who acquired it through force. It is only since the Industrial Revolution moved the basic source of wealth away from land that the opportunity for great wealth that was not obtained by some form of coercion was even possible.

Many of the enemies of wealth will grudgingly concede that those who make it on their own have a moral claim to it. But they draw the line at passing such wealth on to the next generation. Those who inherit it not only have no legitimate claim to this unearned wealth, but are injured in the process, it is said. They lose the will to work, produce and create on their own, often becoming worthless degenerates in the process.

While it is unquestionably true that many of those who have inherited wealth have led lives of depravity and would have been better people without it, this is not the principal concern of those favoring confiscatory estate taxes. In their hearts, they believe that even those who earned great wealth by the sweat of their brow are inherently unworthy. They believe that somehow it is possible for great businesses to be founded, great financial risks taken, inventions created and discoveries made without having to enrich people in the process. Furthermore, they think that those who need the prospect of riches to motivate themselves to accomplish socially beneficial feats are concerned only with their own well-being, and not that of their children and potential heirs.

In reality, the urge to acquire great wealth is very much a function of the desire to give one's children the benefit of that wealth. Take that away and many entrepreneurs, businessmen and others who have managed to become financially successful would lose their desire to work, invest and be productive once they had enough to live out their days in comfort.

More fundamentally, estate taxes are an infringement on private property. If people cannot give their assets to whomever they please without penalty, they really don't own them. Since secure property rights are generally understood to be essential for economic growth, to the extent that estate taxes undermine those rights growth will suffer.

"If people cannot give their assets to whomever they please without penalty, they really don't own them."

Therefore the estate tax is a significant factor inhibiting the inay mean giving a child the financial freedom to pursue a life of public service or philanthropy.

There will always be worthless heirs, who run fortunes into the ground along with their own lives. But those who decry the concentration of wealth should rejoice that this happens as often as it does. The bad judgment and character of those who have benefited from the industry of their parents and grandparents is a key reason why few fortunes perpetuate themselves in America, and why wealth isn't more concentrated than it is.

Unlike the fortunes of Europe, which are still heavily based on ancestry, the turnover among America's wealthy is astonishing. Very few fortunes survive more than two generations, and only a tiny number last longer than three. They invariably are dissipated by expanding numbers of heirs, dividing the fortune into smaller and smaller pieces, as well as the generally lesser abilities of those following in the footsteps of the fortune's originator. Were it otherwise, one could make a case for confiscatory estate taxation. Because it is not, the estate tax really rests not on the case against inheritance, but against wealth itself.

One must look primarily at the impact of estate taxes not on heirs, but on those who acquire wealth with a strong desire to pass it on. In short, one cannot look at the effects of the estate tax only on those at the receiving end. The main impact is on the givers. Here the danger is that the estate tax, coming as it does on top of income and other taxes, imposes a de facto marginal tax rate on our most productive citizens that approaches confiscation.

"Economists universally recognize the distinctive effects of high tax rates."

Economists now universally recognize the disincentive effects of high tax rates. But because the estate tax is imposed on wealth rather than income, and on the deceased instead of the living, it almost always falls outside the universe of taxes that economists mainly concern themselves with. But as the nation's wealth rises, more and more of those clearly in the middle class are affected by the estate tax, or at least believe that they might be. Consequently, they alter their work, investment and other decisions in ways that benefit neither themselves, their heirs, the economy nor the Treasury.

Thus one finds that the burden of the estate tax is far out of proportion to the revenue that it raises. Its personal and economic cost is large, while the revenue is small. In the end, the estate tax can only be justified on the grounds that wealth itself is bad, and it is worth the economic cost of breaking it up. The reality is that the wealthy benefit society in many ways and that the pursuit of wealth - including the desire to pass it on after death - is a major motivation for work, saving, investment, risk-taking, invention, innovation and entrepreneurship for many of our most productive citizens. In the process of acquiring their wealth, however great it might be, they create far more wealth for society.

Not only should the estate tax be abolished, but the war on wealth should also cease. The latter would include a tort law system that frequently treats corporate assets like free money to be dispersed to anyone with a grievance, regardless of the law or the merits of the case; a regulatory system that sees businesses as extensions of the welfare system, mandating them to provide benefits such as family leave as if they are free goods; and an out-of-control antitrust enforcement regime that views big as automatically being bad, and the bigger a business is the worse it is assumed to be.

Ultimately, the goal of egalitarianism should not be to bring the wealthy down, but to raise the poor up. The estate tax is an impediment to that goal. Ironically, it does more to keep the poor down than to bring down the wealthy. It does not promote equality, but does impose a heavy cost on the economy and society. It should be abolished.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.


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