Wealth, Mobility, Inheritance And The Estate Tax
Table of Contents
The Question of Inheritance
Historically, providing for one's family after death was considered something laudable. The Bible says, "A good man leaves an inheritance to his children's children."28 Nobel laureate F.A. Hayek noted that the transmission of assets after death is part of the family's role in transmitting society's standards and traditions.29 Parents often use the promise of a bequest to influence the behavior of their children. They also use bequests to equalize the well-being of their children.30 In this sense, inheritances are redistributive, aiding in the equalization of wealth.31
"The desire to leave an estate is one of the primary motivations for working and saving."
The desire to leave an estate is one of the primary motivations for working and saving later in life. To the extent that the estate tax reduces a parent's ability to leave an estate to his children, it will have a negative effect on his willingness to accumulate wealth through work, saving and investing.32 Curtailment of inheritance will also erode family ties.33
The Right to Inherit. The right to private property would seem to include the right to give one's assets to whomever one pleases, including to one's children after death. The problem arises, however, that once one is dead, one's property rights cease. Rights are only for the living. Consequently, it has generally been held that there is no right to inheritance. In the words of John Stuart Mill: "Although the right of bequest, or gift after death, forms part of the idea of private property, the right of inheritance, as distinguished from bequest, does not."34
A long line of Supreme Court cases have upheld the right of the state to control or even abrogate the ability to transfer assets after death. As one commentator recently stated, "There is no right of inheritance in the United States Constitution. Congress could, therefore, theoretically abolish inheritance."35
The Right to Make Gifts. The right to make gifts during one's lifetime is much stronger. Gifts are also much harder to tax as a practical matter.36 Moreover, the most valuable gift a parent gives a child is in the form of human capital, which is a perfect substitute for financial bequests.37 No gift tax applies to education expenses, no matter how large they might be.38 Given the immense and growing importance of education to one's long-term income, this factor alone may be the single most important means of transferring wealth from one generation to the next for most middle and upper-middle class families.39
The Desirability of Inheritance. Despite the fact that inheritances play a small role in the perpetuation of wealth in America, there are still those who oppose inheritance on principle.40 They harken back to Plato, who advised, "Let no man covet wealth for his children's sake, that he may leave them in opulence; 'tis not for their own good nor for the state's."41 It is also worth noting that the third plank of The Communist Manifesto says that the right of inheritance should be abolished.
Even the wealthy sometimes have supported the abolition of inheritance. In a famous essay, Andrew Carnegie42 said that "he who dies possessed of enormous sums ... will die disgraced." The aim of the wealthy, he said, should be to die poor, having given away the bulk of their assets, as Carnegie himself did. Not only would the philanthropy benefit society, it would also prevent the corruption of offspring who would otherwise inherit the wealth. Said Carnegie:
That the parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would, seems to me capable of proof which cannot be gainsaid.
Of course, Carnegie was not advocating laws against inheritance, but rather urging voluntary action. In any event, empirical studies have not found the deadening effect of inheritances to be as great as he presumed. There is a likelihood that those receiving an inheritance will reduce their labor supply, but the effects are small.43