Mr. Spangler of Milton, Pennsylvania, is a student at Grove City College, with special interest in the Department of Economics headed by Dr. Sennholz.
The idea that economic well-being can be created by eliminating means of production is an economic absurdity. The destruction of factories, shops, warehouses, equipment, tools—in short, capital goods—benefits no one. To practice such policies would send man back to struggling for bare subsistence. In view of such obvious consequences, no one could logically advocate policies of capital consumption but rather would encourage capital accumulation. Unfortunately, logic does not always prevail; every day taxation destroys existing capital and reduces economic well-being.
Dr. Hans Sennholz, in Death and Taxes, demonstrates this impact of taxation and examines especially the results of death duties.
The original role of the federal government was limited to protecting life and property from violence and aggression. Tax laws aimed simply at raising revenue for that purpose. But, as Dr. Sennholz says, "The new America that took shape in our century is a reformatory for man and society. Government has become a powerful agency of reform and redistribution…. Our present tax structure openly aims at greater equalization of income and wealth through tax rate progression." His discussion of estate tax history clearly illustrates this transformation.
The first Federal death duty began with a maximum rate of one‑half per cent and lasted between 1797 and 1802 to aid in financing the national debt and the defense program. An estate tax was also used during the emergencies of the Civil War and the Spanish-American War, and the maximum rate was five per cent. However, in 1916 the death duty came to stay, taxing estates at a maximum rate of ten per cent. This maximum rate has been increased on occasion and presently stands at seventy-seven per cent. Yet, this rate hardly provides enough funds to operate the federal government for half a week. Certainly the objective of estate taxation is no longer to raise revenue but to redistribute wealth. In the name of social and economic equality, income and wealth are taxed at steeply progressive rates.
Dr. Sennholz concludes that progressive estate and income taxes do not achieve their purpose but actually "aggravate the economic inequality" they are supposed to alleviate. In other words, the government’s endeavors to eliminate economic inequality have only made matters worse. To support his conclusion, he points to the nature of wealth and income in a market economy. Insofar as the market is allowed to operate, income and wealth are derived only by producing goods and services for consumers. The greatest income accrues to the most efficient producers, who then can acquire additional capital assets and expand operations, income, and wealth. Their estates consist mainly of capital employed in economic production. "A millionaire’s fortune does not consist of idle luxuries, but of factories, machines, and equipment that produce for the people, give employment, and yield wages."
By increasing the flow of goods and services, the efficient enterpriser raises the real income of other members of society. In addition, he accumulates capital which in turn increases labor productivity. The fundamental determinant of labor productivity is the amount of capital that a worker uses. As capital per worker increases, his productivity and income increase. To have the most efficient producer manage capital and provide for its formation is in the direct interest of all workers. Any act which destroys and consumes capital must necessarily reduce the productivity and wages of workers.1
Inasmuch as the income and capital acquired through production make up the fortunes of successful enterprisers, progressive taxation penalizes the most competent producers and amounts to a tax on efficiency and production. Professor Sennholz warns that progressive income taxes, by aiming to expropriate increasing profits, actually restrain three important economic activities.
A portion of profits is "managerial remuneration," which is earned by a proprietor or partner. "That part of a businessman’s income which is earned through his own labor is a kind of wage or salary, and as such totally unrelated to economic profits."
A second component of profits is ordinary interest, which is a return on capital. People value their present cash more highly than a claim to future cash in the same amount. Consequently, to induce a cashholder to forgo present consumption and convert his cash into capital which will return his investment only in the future, a premium must be paid. No interest payment means no capital.
The third and remaining part of profits is pure or economic profit. By trying to anticipate changing economic conditions and adapting production accordingly, enterprisers either suffer losses or earn profits. These profits (or losses) result from the risk associated with the uncertainty of the future. Whenever these economic profits are denied, no enterpriser will assume the risk of trying to adapt to future conditions; economic progress ceases.
Progressive taxation of income penalizes the most efficient management, the accumulation of capital, and the ability of enterprisers to meet future economic needs. Means of production are employed less effectively, the supply of capital dissipates, and the economy stagnates. A society which supports progressive tax rates is doing away with its most productive activities. Is that any way to run an economy?
Supporters of progressive taxation may concede the uneconomical nature of progressive income taxes, yet may advocate progressive estate taxation: graduated death duties cannot harm a deceased person or penalize the heirs, who benefit no matter how much they inherit. Such shallow analysis avoids all economic issues. Hans Sennholz devotes most of Death and Taxes to showing that progressive estate taxes beget the same economic destruction as do progressive income taxes.
"The creator of a taxable estate gives thought and effort to the impact of the levy that may greatly impair his life’s work,… and may make adjustments in his actions while he is still alive." A progressive death tax may push a person with exceptional productivity into early retirement. He may prefer leisure to work, because the additions to his estate will be taxed at increasing rates. Society loses the proficient producer. Moreover, "death-tax considerations cause him to be consumption-oriented. Many estate owners are tempted to convert their productive assets that yield income into consumptive assets for their own enjoyment:’ The estate taxpayer does not increase his capital assets but consumes his substance before the tax collector can get it. Graduated estate taxes retard capital formation and thereby productivity and wages. Furthermore, the estate tax’s "potential victims cannot be expected to stand by when their economic accomplishments are to be seized and distributed." The affected estate owner will direct his energies to tax-avoidance instead of productive management.
When the estate owner finally passes on, the estate taxes result in pure capital consumption. Because the bulk of an estate formed under a free market is in productive assets, an estate tax is foremost a levy on capital. "Death duties do not immediately and visibly destroy such capital equipment as steel mills, railroads, or refineries. But they force the heirs or owners to sell all or part of the taxed estate in order to raise the cash needed for the tax payment. This cash is liquid capital that is consumed by government visibly and noisily." Clearly, estate taxes do consume capital and oppress its efficient management, and must necessarily reduce labor productivity, wages, and living standards.
Recall that government’s purpose in imposing progressive estate and income taxes is to reduce economic inequality. Death and Taxes shows these policies have the entirely opposite effect: "Taxes imposed on the rich are taxes on economic production. They consume the very capital that creates jobs…. To advocate higher taxes on the rich, most of whom are highly productive businessmen and investors, is to expropriate the very means of capital investment that afford jobs and better living conditions for the poor…. This is why, contrary to popular belief, progressive death duties do not diminish economic inequality; they are powerful instruments for creating it…. With every dollar of net (capital) consumption the worker’s productivity must decline, as must his wages and living conditions…. The rich man, however, may manage through talent, industry, or thrift to preserve… comfortable living conditions." The government has only nourished what it has set out to erase.
Death and Taxes clearly exemplifies one of the important lessons of the late Professor Ludwig von Mises: "Interference with the market… may in the short run attain ends aimed at by the government. But in the long run such measures always result in a state of affairs which—from the viewpoint of the government—is more unsatisfactory than the previous state they were intended to alter."² Such measures disregard economic laws. Progressive estate and income taxation disregards the economic principle which Dr. Sennholz states as, "Economic and social inequality is inversely related to economic productivity, income, and wealth. Inequality tends to grow with declining labor productivity; it tends to diminish with rising labor productivity."
As if graduated taxes were not damaging enough, government compounds their results by promoting inflation—expanding the money supply. As Professor Sennholz explains, inflation causes prices to rise and expropriates purchasing power from moneyholders. Inflation redistributes wealth and income, consumes capital, and pushes tax-payers into higher and higher brackets.
Death and Taxes concludes with a particularly enlightening chapter. Hans Sennholz has analyzed recent estate tax alternatives and reform proposals. This reading dispels all wonder as to why progressive estate and income taxes flourish. The proposals of the various individuals and organizations amount to little more than new methods or details of expropriating the estates. Many presentations are merely pleas for exemptions, privileges, and favored treatment. The alternatives disregard economic principles. No mention was made of the economic ruin caused by estate taxation. Moreover, no proponent even questioned the morality of the government’s taxing the life’s work of one person more heavily than another. What moral right does the government have in confiscating any part of a decedent’s estate?
A fight for tax relief based on political favoritism only advances the redistributive society, which uses estate taxes for its ends. The question of estate taxes, indeed any taxes, must rest on economic and moral principles. Death and Taxes exposes the futility of the estate tax. Dr. Sennholz has presented economic and moral principles which call for the summary abolition of estate taxation.
1 See also Dr. Sennholz’s "Capital Consumption," The Freeman, May, 1976, pp. 282-299.
² Ludwig von Mises, Bureaucracy (New Rochelle: Arlington House, 1969), p. 84.consumes capital, and pushes taxpayers into higher and higher brackets.