Taxes & Spending

Death Tax: Not Simply the Paris Hilton Tax

Washington Post columnist Sebastian Mallaby posits that, "It doesn’t matter if you are liberal or conservative, Democrat or Republican. There is no possible excuse for doing what Congress is poised to do this week: Abolish the estate tax."

This is a rather odd position to take for something that has wide, bipartisan support among both the American people and their elected representatives (the House voted 272 to 162 for the phase-out last April 2005) and the opposition to which can not even muster a sufficiently sizable minority to mount a credible filibuster.

For most of the past century, the case for the estate tax was regarded as self-evident. People understood that government has to be paid for, and that it makes sense to raise part of the money from a tax on "fortunes swollen beyond all healthy limits," as Theodore Roosevelt put it. The United States is supposed to be a country that values individuals for their inherent worth, not for their inherited worth. The estate tax, like a cigarette tax or a carbon tax, is a tool for reducing a socially damaging phenomenon — the emergence of a hereditary upper class — as well as a way of raising money.

Of course, the estate tax has not actually succeeded in this goal. Names like Bush, Kennedy, Rockefeller, DuPont, and others remind us of that. Indeed, of the top ten on the most recent Forbes 400 list of richest Americans, five spots are taken by the Walton Family. The Cox and Mars families are getting by, too, with numerous representatives in the top twenty. One suspects that, a couple decades hence, so will the Gates, Buffett, Allen, Dell, and Ellison heirs.

Mallaby argues that the treasury money would lose by making the estate tax repeal permanent has to come from somewhere:

If the abolitionists succeed, some other tax will eventually be raised to make up for the lost revenue. So which tax does Congress favor? The income tax, which discourages work? A consumption tax, which hits the poor hardest? The payroll tax, which is both anti-work and anti-poor? Really, which other tax out there is better?

Even before its repeal, the estate tax made up only 1.2 percent of federal revenues; we’re not talking about a massive windfall. And an income tax only "discourages" work if it is so graduated as to be confiscatory. Thanks to John Kennedy and Ronald Reagan, the days of 90 percent, or even 70 percent, tax rates on the upper reaches are behind us.

A consumption tax can certainly be targeted so that food, medicines, and other basic necessities are omitted with "luxury" items hit at a steeper rate. Indeed, Harvard economist Greg Mankiw points out that, "There is a vast literature in economics arguing against capital taxation in favor of consumption taxation."

And the payroll tax — i.e., the Social Security tax — exists solely to provide for the poor; the very wealthy surely do not need the government pay them a retirement stipend.

Mallaby suggests that the only reason the repeal of this tax is politically possible is because the public is stupid and uninformed:

People often remark on the perversity of popular support for estate-tax repeal. A majority wants to abolish the tax, even though only the richest 2 percent of households have ever had to pay it. Yet this shoot-your-own-foot weirdness is easily explained: Most people just don’t know that, under the law’s current provisions, a couple can bequeath $4 million without paying a penny to the government.

Perhaps Americans simply understand a basic principle: Earnings belong to the earner, not the state. Microsoft pays corporate taxes and Bill Gates and Paul Allen pay hefty income taxes on their shares, in addition to various sales taxes and fees. The idea that the state has the right to take another huge chunk of their money when they die, rather than allowing them to pass it on to their children, simply strikes most of us as outrageous.

That only the wealthiest two percent of households have to pay the tax in an argument for its unfairness, not its virtue. Paul Krugman argues that this is a "moral issue" and that it is irresponsible to "enlarge the deficit to give Paris Hilton a tax break."

I don’t deny that there’s something unfair about the likes of Paris Hilton or the Kennedy kids being set for life simply by being born. To the extent that we want our society to be based on "merit," inherited wealth creates disparities. If the solution is governmental confiscation, though, I want no part of it.

For that matter, if social engineering is our goal, why not simply tax the estates of all decedents 100 percent? Then, no one would have unearned income.


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