President Obama's American Reconstruction and Reinvestment Act of 2009 ("ARRA"), better known as the stimulus bill, contains language to freeze the estate tax permanently at 2009 levels, but Senators Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) have proposed an amendment to reduce the rates.
What follows is my rationale, from a libertarian perspective, about why the estate/inheritance/death tax is unsound, and why it should end.
Background
The 2001 tax-cut law (Economic Growth and Tax Relief Reconciliation Act of 2001, or EGTRRA) gradually phased out the estate tax by raising the exemption level and reducing the top rate. In 2009, estates valued at more than $3.5 million per individual ($7 million per couple) owe tax, with a top rate of 45 percent. Under EGTRRA, the tax will disappear completely in 2010 but reappear in 2011 under its 2001 parameters, with a $1 million exemption and a 55 percent rate on the largest estates.
President Obama has proposed extending the tax permanently at its 2009 level (taxing estates worth more than $3.5m/$7.0m at up to 45%). The Lincoln-Kyl amendment to the budget resolution would pave the way for subsequent legislation to increase the exemption to $5 million per individuval/$10 million per couple, and reduce the top rate to 35 percent.
Ideological Debate
Few issues divide people as starkly -- few fence-sitters here -- as how the government should treat a person's wealth after he or she dies.
Liberals believe that taxing an estate -- especially for the rich who, they assume, can "afford" it -- is eminently fair, as a redistributive measure towards those less fortunate.
A more ideologically honest argument in favor of the estate tax, I believe, would be that passing wealth on to one's heirs provides them with an unfair, unearned financial advantage in the game of life.
I believe the so-called "death" tax should be eliminated entirely for multiple reasons.
Fiscal Reason for Eliminating the Estate Tax
The fiscal reason is that any assets -- be they real property, financial, business equipment, personal property, etc. -- have already been taxed multiple times. Consider, for example, the tax obligations placed on a car purchased in Virginia (where I live):
- The car must be paid with income reduced by state and federal income taxes.
- The cost of the car itself is increased by three percent sales tax.
- Every year thereafter, the owner is assessed a five-percent personal property tax (although some relief is provided).
Philosophical/Ideological Reason for Eliminating the Estate Tax
I can understand (though disagree with) the thinking that guides the rationale of inheritances offering unfair to the heirs -- for why should someone who did not earn those assets be given essentially an unearned advantage in life?
Holders of that argument ignore -- nay, dissolve -- the rights of the property owner (i.e., the bequeathor). I have yet to hear a cogent argument about why the State deserves a claim on property of the deceased.
The inevitable, inescapable act of dying, it is implied, confers property rights for those assets to the State, which is a perfect example of the State's confiscatory nature to coercively demand any and all rights and property from the citizens.
As the economist Murray Rothbard states in For A New Liberty:
"Many people are willing to concede the justice and propriety of property rights and the free-market economy....But they balk at one point: inheritance. [W]hat ... is the justification for someone whose only merit is being born a Rockefeller inheriting far more wealth than someone born a Rothbard? The libertarian answer is to concentrate not on the recipient, the child Rockefeller or the child Rothbard, but to concentrate on the giver, the man who bestows the inheritance. For if Smith and Jones and Stargell have the right to their labor and property and to exchange the titles to this property for the similar property of others, they also have the right to give their property to whomever they wish."The reality, I think , is that those in favor of an inheritance tax would probably not want their inheritance to their children halved. If that is the case, it is not logical to wish the opposite on someone else. Therein lies the basic flaw in so many ideological arguments: "Do as I say, not as I do."
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By your rationale, then, you would be opposed to the "Law against Perpetuities," since this is also a restriction on an individual's power to exercise dominion over their property. It is one thing to say that an individual should have certain inalterable rights to dispose of their property while living, but why is it necessarily the same right that should follow an individual after their life has ended?
ReplyDeleteI disagree with your premise that the rationale against the estate tax is that heirs should not get an unfair advantage. The ultimate premise for the estate tax is that 1) Dead people have no rights. Do as they will while living but they should not be able to control the living in absolute terms after life; and 2) When you allow individuals to freely exercise control over wealth beyond their lifetimes, this ultimately maintains control of property in too few hands. Generations in the future will have less opportunity to gain wealth if too much is locked up in the hands of too few and this is really undemocratic.
Well, you can't take it with you. And you worked hard (assumingly) to get it. So you should absolutely be able to do with it what you please when you die. Dying is not an option it happens whether you like it or not and you should not be detered from succeeding in life because the state will get it all when its over. I want to leave everything I have to my kids. There is nothing wrong with that. And if my family owned property and it was passed from generation to generation what's wrong with that? Someone will eventually sell it, thats almost inevitable. So what's the problem? We have a few families that used to control ALOT of property here in Culpeper and little by little they have sold off parcels and homes have been built. They keep some for themselves too. But no one wants to be responsible for 100+ acres anymore, unless they are farming. I have to constantly keep telling people, America is the land of equal opportunity, not equal results. If you want land, work hard save your money and BUY SOME. There is plenty to go around. And keep you mitts of mine and my family's. Gadfly's comment sounds an awful lot like redistribution of wealth (and property). NOT democratic at all. Socialistic. Communistic maybe. But NOT democratic.
ReplyDeleteEngland, which is the model that the US property system is based on allows people to deep property to their heirs in perpetuity. In other words, to their son (for his life) and then to his son (for his life), forever. No one can ever sell the land because of the way it is deeded. This has significantly retarded the possibility for many people to own land in England - and forclosed future generations from doing what they might want to do with the land. It isn't efficient from an economic perspective. My position is socialistic - it actually backs up part of what you indicate as your position. If families who arrived in your area generations before your family acquired all the land and were allowed to pass it on forever to their own family - you wouldn't be able to buy land because there wouldn't be any available. It's a balancing act. But it doesn't benefit society as a whole to allow a small percentage of people to lock up all the wealth in perpetuity. That leaves LESS opportunity for those who come along with ambition and desire in the future. I'm not in favor of any redistribution - only giving everyone an equal chance - which they can't get if you allow people to lock up wealth forever.
ReplyDeleteMy last post should read "My position is NOT socialistic,"
ReplyDeleteGadfly,
ReplyDeleteThanks for your comments -- I appreciate your perspective and viewpoint. I do think, however, that your analysis is flawed because it assumes a static environment, and does not recognize how property transfers have occurred, especially in the 20th century. Let me explain.
Before I say anything, though, one must recognize that as long as property taxes exist, we never "own" the property. Yes, we may pay for it and receive a deed, but just try not paying the taxes on it, and see how strong your property rights are. Shoot, Virginia (where I live) has personal property taxes that include your vehicle. One can make the argument that, as long as I live in Virginia, I don't really own my vehicle if the state has a claim (backed by a monopoly on violence) on it, should I not pay the appropriate tax.
Back to my statement that I believe you are looking at the situation as static. You state that "When you allow individuals to freely exercise control over wealth beyond their lifetimes, this ultimately maintains control of property in too few hands."
That would definitely be true if property never changed hands beyond the original homesteaders, or early generations. However, I find little evidence that property has become concentrated due to the existence of estates. Just the opposite, in fact -- subsequent generations have very different plans and goals compared to their predecessors, and the current generation is very transient and mobile. Therefore, I would argue that many properties handed down are subsequently sold, with proceeds used to fund different ventures.
Philosophically, I do not believe that the State should be the benefactor of my effort when I die. Taken to the logical extreme, one can argue that, if no one helped me build my business, than no one has a claim on it when I die. Therefore, I should have the ability to determine who has the values, experience, and knowledge to continue my business (or maintain my property) as a going concern. If I believe that my children are not capable, I am not forced to bequeath it to them. The important point is that I am able to choose -- even if I decide that the State deserves the fruit of my life's work.
The American property system seems to differ from England's in the sense that, in England, it appears that current property "owners" might not have the right to control true ownership of the property. That system is vastly different from ours. The very fact that the deeding is so inflexible ensures that the property will never realize its true value.
Scott,
ReplyDeleteYou're making my point about the "law Against Perpetuities." The US has it - England does not. Trusts like the Rockefeller and Kennedy trusts were formed prior to the enactment of this law - so they will live on forever. So Caroline Kennedy and her heirs will forever get to be in the discussion for appointed Senate seats because her grandfather was a very successful bootlegger during prohibition.
The Barnes Musuem in Philadelphia is similarly encumbered forever because it was deeded to an innercity trade school that can't even remotely take full advantage of the power of the collection. Similarly, you could say that the deeding of Dumbarton Oaks in Washington, DC to Harvard University - in perpetuity - provides little value to Harvard or the community. The estate lies on some of the most valuable real estate in DC. Not just in money terms but for space in an overcrowded area.
This is not to say that I advocate razing Dumbarton and putting public housing there - just that having 100 (?) acres of the most prime land in DC where the only value deriven is the ocassional tourist gets to walk through some relatively mundane gardens does not seem to serve ANYONE very efficiently. And yet whoever owned the property however many years ago 60-70 years chose to tie up the property in this way, and now we all suffer - even Harvard - because the property has little value to them either.
I also don't fully accept the premise that estate taxes really are just the state appropriating private property. Although I heartily agree that the state quite often will spend money in less than efficient ways, the revenue it generates via estate taxes does, in some manner, diminish the tax load that those who are still living, working, and paying taxes have to carry.