by Sheldon Richman
Sheldon Richman is the editor of The Freeman and In brief.
A bid to permanently repeal the federal estate, or inheritance, tax lost to a Senate filibuster yesterday. A compromise that would tax inheritances at a lower rate than previously is still possible, however. The tax has been in phase-out mode since 2001 and on its current course would disappear in 2010, only to reappear the following year. (Think of the incentives that creates.)
The possibility of repeal had Big Government folks (the Bee Gees) beside themselves because it would cost, that is, deny the social engineers, $600 billion over ten years starting in 2011. (To put this perspective, at current levels the feds would spend $30 trillion over that time.) These days Bee Gees often pose as fiscal hawks, worrying about the mounting deficit, but what really seems to irk them is the loss of revenue in itself. There'll simply be less money for politicians to spend if the tax goes away. To be sure, the deficit is outrageous, but contrary to what the Bee Gees say, there's an alternative deficit-ending strategy to taxes: cutting spending. Apparently every dollar of the nearly threendash;trillion-dollar annual federal budget is indispensable.
That people actually own the money they make, and have the right to distribute it to their heirs, is conveniently ignored by tax defenders. Lots of strictly economic arguments can be made against the inheritance tax, for instance, its power to distort investment decisions to the detriment of workers and consumers. As Nobel-Prize-winning economist Edward Prescott writes, [A]n estate tax is really just another name for a tax on capital income. . . . [W]e can only grip the neck of our vibrant economic goose so tightly before it eventually dies and quits laying those golden eggs. But today we'll focus on overlooked moral issues.
Working from the premise that the best tax is a repealed tax, let's look at a typical argument against ending the death tax. It was made the other day by Washington Post columnist Harold Meyerson. (See it here.)
Meyerson dismisses the claim, popular with death-tax opponents, that it forces family businesses and farms to sell their assets in order to pay the tax: That was always nonsense, and under the estate tax revisions that almost all Democrats support — raising the threshold for eligibility to $3.5 million for an individual and $7 million for a couple — it becomes more nonsensical still.
He goes on to say,
Under the $3.5 million exemption, the number of family-owned small businesses required to pay any taxes in the year 2000 would have been just 94, according to a study by the Congressional Budget Office. The number of family farms that would have had to sell any assets to pay that tax would have been 13.
I don't know if the CBO is right or wrong. But if it's right, why does Meyerson take the fate of the 107 families so lightly? Stalin said that one death is a tragedy; a million is a statistic. Now that's turned around. Apparently a million families forced to sell their businesses or farms to pay the death tax would be a tragedy, but fewer than a hundred is just a statistic.
Yet those 107 families comprise real people with plans and aspirations of their own. Their dreams may be unimportant to Meyerson and other Bee Gees, but I guarantee they are not unimportant to the families. Here's a clue to why Meyerson can't be bothered by such collateral damage:
On the other hand, an estate tax repeal would save the estate of Vice President Cheney between $13 million and $61 million, according to the publicly available data on his net worth. It would save the estate of Defense Secretary Donald Rumsfeld between $32 million and $101 million. The estate of retired Exxon Mobil chairman Lee Raymond would pocket a cozy $164 million. As for the late Sam Walton's kids, whose company already makes taxpayers foot the bill for the medical expenses of thousands of its employees, the cost to the government for not taxing their estates would run into the multiple billions.
In other words, it's worth sacrificing the dreams of a small number of people if it lets us get at the fortunes of the wealthy families. That attitude is ugly.
And it doesn't even work. As the Wall Street Journal asked yesterday (editorial, Taxes Everlasting), Do the Kennedys or Rockefellers look any poorer from the existence of a tax first created in 1917? Of course not. They can afford lawyers to shelter their estates. Could the tax really be an old-wealth protection act? The Journal reports that the biggest defender of the tax is the life-insurance industry, which could lose billions of dollars from policies written to avoid the tax.
Ill-Gotten Gains
A qualification here: It is absolutely true that in America's state-skewed corporatist economy, many fortunes are made illegitimately, through, for instance, huge government contracts for things government has no business doing in the first place. Fortunes are also made through the countless ways the state cartelizes and protects favored businesses, sheltering them from competition and otherwise bestowing privileges unattainable under laissez faire. Those privileges come at the expense of consumers, workers, and would-be competitors, who'd be enjoying lower prices and higher real incomes if the marketplace were really free.
That said, the estate tax can't be justified on the grounds that some fortunes are ill-gotten. I see no provision in the tax law that distinguishes legitimate from illegitimate estates. If we are concerned that a privileged elite gets money through the political means, there's an easy solution: drastically slash the size of government and remove its power to make people rich through contracts, subsidies, loans, and guarantees. What Gordon Tullock calls welfare for the well-to-do should be the first welfare to go. But let's not punish the making of money in itself. If a person has no right to what he produces, why does the state have a right to it? And if a person does have that right, then he also has the right to decide what will happen to it when he dies.
Quoting Prescott again, What is fair . . . about telling someone that he will be unable to distribute his hard-earned money, which has already been taxed once, to his heirs as he sees fit? Bee Gees don't even try to defend this tacit and literally absurd proposition that people have no right to their money but the politicians do. They take that ominous principle for granted. Tragically, many others would agree with them.