Sunday, September 25, 2016

Kill the estate tax

Caroline Freund writes at PIIE that the estate tax is a key tool for fighting US inequality. I strongly disagree. It's easy to rebut her main points, since they defy logic and are based on faulty statistics. What follows are some quotes from the article and my rebuttals:

This year marks the 100th anniversary of the US estate tax, which affects only the ultra-wealthy.
–Not true. Narrowly defined, the US estate tax affects only people whose estate currently exceeds $5.45 million, or couples whose estate exceeds $10.9 million. However, that is hardly a reasonable definition of "ultra-wealthy" in a era when it takes a net worth of at least $1.7 billion to make the Forbes 400 list. More broadly, the estate tax affects anyone who is wealthy or hopes to one day become wealthy—and those are the people who are most likely among the most productive members of society. The estate tax is effectively a punishment on success, since it amounts to the legalized theft by the state of money people have worked hard to accumulate, and upon which they have already paid tax at least twice (once when they paid income tax on their earnings, and a second time when the equity investments they made with their after-tax earnings had their profits taxed). Punishing success is like cutting off your nose to spite your face.

There is no productive activity in inheriting a large sum of money, so it does little to distort the economy.
-On the contrary, the estate tax creates huge distortions in the economy. How else to explain the virtual army of accountants and lawyers who toil to reduce the estate tax liabilities of their clients? How else to explain why the insurance industry—which sells a legal run-around to the estate tax in the form of life insurance policies—fights so hard to keep the estate tax in place? How else to explain why today's mega-billionaires (e.g., Bill Gates and Warren Buffett) are directing that their estates be donated to charitable foundations? I don't know anyone who wants to give almost half of the wealth they have accumulated after a lifetime of work to the government.

Historically such taxes have worked well in the United States, raising revenue and redistributing wealth.
-No, the estate tax has hardly worked at all. In the most recent 12 months, the federal estate tax generated revenues of only $21.4 billion, a paltry 0.6% of total federal revenue. How does redistributing $21 billion qualify as income redistribution, when personal income is currently running at a $16 trillion annual rate? How can anyone justify having a behavior- and economy-distorting tax that redistributes only 0.13% of total income? How well will the mega-billion Gates Foundation fight inequality, when it is extremely likely that it will spend only 5% per year of its endowment on charitable activities (the legal minimum required of any charitable organization)? No one really knows, but that doesn't seem to worry the people who defend the estate tax.

The author laments the fact that the estate tax has been reduced in recent decades, erroneously claiming that the estate tax generated $216 billion in 2001, when in fact it generated only $28.2 billion at a time when personal income was $9 trillion (0.3%). In the past 35 years, the estate tax has never generated more than 0.35% of total personal income in any one year.

The author further erroneously claims that the estate taxes collected in 2001 could cover the cost of food stamps "14 times over." That is wildly off the mark, since the total cost of food stamps in 2001 was $18 billion, whereas estate tax revenues were $28.2 billion.

If we eliminated the estate tax in its entirety, the economy would most likely strengthen, living standards would rise, and the impact on the federal deficit would be nil. Eliminating the estate tax would increase people's incentives to invest and accumulate wealth—wealth which is enjoyed by everyone, just as we all benefit from the fruits of successful companies. And with increased wealth and incomes, federal revenues would increase. By making this assertion, I rely on nothing more than my strongly-held belief that people are able to invest their own money much more efficiently and productively than government bureaucrats and politicians can.

UPDATE: Scott Adams (Dilbert) recently posted a quick-and-dirty takedown of the estate tax and Clinton's proposal to raise it (in the same post he also explains why he is now endorsing Trump):

Clinton proposed raising estate taxes. I understand that issue and I view it as robbery by government.  
 ... under Clinton’s plan, estate taxes would be higher for anyone with estates over $5 million(ish). I call this a confiscation tax because income taxes have already been paid on this money. In my case, a dollar I earn today will be taxed at about 50% by various government entities, collectively. With Clinton’s plan, my remaining 50 cents will be taxed again at 50% when I die. So the government would take 75% of my earnings from now on. 
Yes, I can do clever things with trusts to avoid estate taxes. But that is just welfare for lawyers. If the impact of the estate tax is nothing but higher fees for my attorney, and hassle for me, that isn’t good news either. 
You can argue whether an estate tax is fair or unfair, but fairness is an argument for idiots and children. Fairness isn’t an objective quality of the universe. I oppose the estate tax because I was born to modest means and worked 7-days a week for most of my life to be in my current position.


steve said...

I have long thought that the "death tax"is the most unfair tax ever devised. You pay tax and follow the rules your entire life only to have the government literally steal your accumulated wealth upon your death? That's ridiculous! Only far left whackos would consider this remotely fair.

Dimitris said...

This is a discussion among the ultra - rich , yes those who own more than 5 million in real estate. US is a country where 50% of its citizens have less than 1000 usd in their bank accounts and most of them are deprived from basic health care...These are issues that have to be fixed in the medium term , not what real estate taxes are paying the 3%-5% of ultra rich US citizens...

Andy said...

Scott - you are 100% correct. Thanks for your hard work and research.

amritsari said...

If you believe that people should be rewarded for their hard work then how is it fair for the children of the ultra rich to inherit millions/billions ?? How is it good for society to have these people be lazy and live off the hard work of their parents. Anybody who can't survive on inherited estate of less than 5 million is an idiot and deserves what they get.
Look at the Trump children - all living off their Dad's dole and now they are lecturing the rest of us about what is good for us. Hope they don't get a dime when shuffles off the mortal stage.

steve said...

Excuse me! An estate tax that starts at $5.45M and $10.9M for married couples is not the "ultra-rich"! I've worked hard and smart my whole life and if I want to leave my estate to my 5 children rather than the idiots in DC to waste that should be my prerogative-or am I missing something here?

Scott Grannis said...

The government has no right to tell me I can't give my entire estate, no matter what the size, to my children if I so choose. It's my property, the fruit of my hard-earned, after-tax efforts, and I should be able to dispose of it as I please. This is not a question of "fairness" which is completely subjective, this is a question of property rights. The estate tax is legalized theft, pure and simple. To see it any other way is to embark on a dangerous and slippery slope to socialism.

Frozen in the North said...


The funny thing with all this "relatively stupid" discussion, is that if you are seriously rich its rather simple to greatly reduce estate taxes. As for government's theft, with that logic all taxes are a form of theft, if you want to be precise. The problem of course, is that this is a decision that society makes that those who get the most should pay the most -- you may not agree, but you are free to leave...

Its also not a question of property right, because once you are dead you no longer have any property -- your estate does, and that's a different story. They have not earned or paid any taxes on this "unearned gain". Arguments can be made both ways but I assure you that as long as you are alive you are fee to do anything you want with your assets. Once you are dead, no cares about your opinion, least of most the government.

Scott Grannis said...

Actually, you are not "free to do anything you want with your assets" as long as you are alive. If you want to give a chunk of your estate to someone while you are alive, you have to pay "gift" taxes if the gift exceeds a certain amount. In essence, you pay the estate tax whether you are alive or dead.

Furthermore, if you want to escape US taxation of all kinds, you can't just leave the country. Upon renouncing your citizenship (the only thing that unburdens you from US taxation), you must pay an exit tax of about one-third the value of your net worth. We can thank George W Bush for that obscene piece of legislation, by the way.

My larger, and I hope more compelling, point is that the estate tax should be abolished because it creates huge distortions in the economy yet it yields almost nothing in the way of revenue or redistribution. It's an extremely inefficient tax that most likely causes more harm than good. Not to mention that it fails utterly to achieve its stated goal of "redistribution."

amritsari said...

You have still not explained how a zero estate tax would be good for the inheritors or society. I though greed was supposed to be the fuel for capitalism. Without the motivation to make millions where is the hard work ?? As it is, the offspring of the rich have tremendous advantages growing up.

It seems the motivation for no estate tax has more to do with the individuals feeling towards government and taxation. I know what a zero estate tax will do - create an increasingly feudal society. Having grown up in one outside of the US, I have no desire to see the same disease develop here.

CurmudgeonlyTroll said...

When you inherit an estate, your tax basis becomes the current value of the estate. There is a free step-up from the cost basis of the person you inherited it from. If you're saying there should be no estate tax, you're also saying there should be no capital gains tax on it.

Personally, I find that a little odd, since people who make their living from capital gains should probably pay income taxes, just like people who make a living from wages. It's quite easy for business owners to turn income into various forms of capital gains and capital distributions, and defer them until they become an estate passed on to their kids.

Scott Grannis said...

I've been convinced by many others that the ideal tax regime would abolish all taxes on capital and labor and instead tax consumption. "When you tax something you should expect to get less of it," as Art Laffer is wont to say. Why should we tax capital, when that is essential to productivity, progress, and living standards? Why should we tax labor, when that is what makes the wheels of everything turn? By taxing consumption we would give people an incentive to save and invest, and that would maximize capital formation. A consumption tax would also be less invasive than other taxes, and it would capture activity in the underground economy since everyone who makes money has to spend some portion of it to live. Of course there should be some exemption for the lower and middle classes, since they tend to spend a much greater portion of their income. A consumption tax is easy to comply with: simple declare how much you made in a given year, and how much you saved; the balance is how much you consumed, and on that you pay a tax.

In our current tax system, frivolous consumption is favored and investment and capital formation is penalized. I could squander my entire estate in Las Vegas and not pay a dime to the government. But if I gave the money to a friend or to my son, it would be heavily taxed. That is insane.

If we must have capital gains taxes, then one's cost basis should be indexed for inflation. Currently it's not, and that results in an effective capital gains tax that is much higher than the stated rate.

steve said...

CONSUMPTION TAX! With an exemption for food/clothing/shelter for lower spending levels and ELIMINATE income tax and "death tax".

mmanagedaccounts said...

I am shocked at many of these responses to Scott's article and am surprised there is no comment thus far from Benji. So I know Darryl who started his drum business from basically nothing 35 years ago. He worked very hard and grew this business that now employees more than 100 people and has zero debt. The business is currently valued at over $30 million. Darryl has very little life insurance because of chronic health conditions that have existed all his life. He lost his wife last year to cancer, has three daughters and six grandchildren.

Darryl is in his mid-70s and is still working. Two of his grandchildren work for the business.

So my question is, what happens to this business when Darryl dies? The federal government is going to want about $15 million. From where will it come? Selling off business assets? What will happen to the 75 employees who have been very well paid? I just don't see how this huge confiscation by the government promotes economic growth or is helpful to those who now work for this company.

The estate tax is an unfair, anti-growth tax.

CurmudgeonlyTroll said...

No argument from me that capital gains taxes should be indexed for inflation, or that a VAT would be much more efficient.

In my opinion, any individual tax can be made to sound unfair...why should my hard work be taxed, while Donald Trump's or some carried-interest joker's capital accumulation is not? You have to look at the whole system and the true incidence and efficiency, which is quite hard.

Sounds like in your view not just the estate tax, but taxes on capital and income are undesirable, and I'm not really sure why the estate tax is the worst. But for sure the existing is system is hodgepodge, inefficient, target-rich for rent-seeking, and hard to argue for on fairness grounds.

TJ33A said...

Very interesting to read this article and the comments that followed. As a Brit, we also have punitive inheritance tax that starts at a lowly 500,000 USD approx and is 40% which means that many people can't even pass on their property to their loved ones. This is a problem that I wrestled with but I chose to leave and now live in a part of Asia where there is no capital gains tax, no inheritance tax, no tax on income from foreign investments and it is mightily refreshing and liberating, although not without it's challenges. From what I read here they really have you Americans by the balls though as leaving itself is punitive to you guys. I am not liable to UK taxes (except estate tax) once I leave the UK for more than a year and I can renounce my domicile if I so wish without repercussions. It really sounds as if "government" in the USA has really got beyond what its founding fathers ever intended and has become something of an oppressive monster. Scary stuff.

Johnny Bee Dawg said...

Its incredible to see and hear arguments from greedy people who feel entitled to steal money from families who have accumulated wealth.
We now have an immoral populace who see the rich as their piggy bank.
As long as this socialist, anti-American, unlawful, immoral mentality persists in this country, we won't ever live up to our potential, and the poor will suffer most of all. Opportunity crushed. Growth will remain under trend.
This is the same crowd that wants to increase the size and scope of government at the expense of the individual.

Totalitarianism and socialism have NEVER WORKED anywhere at any time.
Nitwittery on display.

Michael Meyers said...

Just one person example of why the estate tax is counter productive.....I was a highly educated and highly paid software engineer who chose early retirement rather than continue working where 75% of my income went to taxes.

Scott Grannis said...

Meyers: That's very similar to my story. I'm retired and would rather work free on my blog than pay the government two-thirds of whatever I might make. I considered started a small company but reconsidered after reviewing the onerous regulatory and administrative burdens and my very high marginal tax rate.

amritsari said...

Its funny how the USA is such a "socialist" and "totalitarian" country, confiscating the wealth of its citizens, yet it continues to be the richest and one of the most sought after domicile of people from all over the world !

Johnny Bee Dawg said...

Yeah...Golden Goose will never die.

Under Fundamental Transformation, our GDP is only $2 trillion below trend, and debt to GDP has shot up to only 106% (including intergovernmental holdings, which is still debt). Like during WW2.
Raising taxes and increasing regulations will get things moving this time. Hillary is an economic savant...just like Barack.

We haven't had a single year of at least 3% GDP growth under Barack's entire rule. He is the first President in US history to never have a 3% growth year...even after 2 terms. "What, me worry??" (Google Alfred E. Neuman.)

Redistribution is working just fine. Totally sustainable. Rejoice! Embrace! All One.
Don't worry about inflation, either. Central Planners have banned it.
Lets get debt to equity up to 200% so we can REALLY prosper! Credit cards are fun!
Its all FREE with interest rates today. Just ask Europe!

Everybody come on in! OF COURSE this is the most sought after domicile.
Open borders combined with a welfare state makes quite an appeal.
As Barney Frank said: we have plenty of rich people the government can get money from!
After all, "They didn't build that."
What's there's is ours. You have a RIGHT to it.
Claw it back.

And risk aversion continues.