Inheritance Taxes
At lunch today we were talking about inheritance taxes. Why are they considered unfair?
I think it is because it is a tax on virtuous behavior. Saving is virtuous compared to spending now. Giving away money is virtuous compared to spending it on oneself. Bequests are both saving and gifts. Hence, to impose a massive tax (say, 40%) on a bequest while imposing small taxes (say, 4%) on selfish consumption is unfair.
From a value-maximizing point of view, the giving away of money has the benefit that it makes two people happy — the giver, and the donor. Also, if taxing investment income is value-demaximizing, inheritance taxes are bad because they are a tax on saving. They tax the principle of saving, not just the return.
August 23rd, 2007 at 8:27 am
Inheritance tax should be looked at as a punishment for not distributing your wealth to government approved organizations (501c3’s). The primary punishment is that you don’t get to choose, so you don’t get the joy of giving, unless you feel the government will do a better job of distributing it. Carnegie, I believe, fulfilled the former.
August 24th, 2007 at 10:23 am
On the contrary, inheritance taxes should be viewed as the mechanism by which a social democracy tries to prevent the accumulation of huge fortunes in private hands. Given that half of the recent income gains in the U.S. have accrued to the top 1/4 of one percent of wealth-holders, one can only wish that such a wise policy was in force today.
Inequality breeds corruption. “Malefactors of great wealth,” if left alone, will bend social policy to their own needs at the expense of the great mass of people. As we have seen during the administration of Bush II, this leads to declining average income, militarism, and environmental degradation.
Are inheritance taxes an imposition on the rich? Absolutely! That is the entire point.
August 29th, 2007 at 9:58 am
1. Robert makes a very good point, though it doesn’t quite fit the current inheritance tax. Currently, even if you leave your fortune to charity, you pay inheritance tax, because it is not a bequest tax, but an estate tax. I’m not certain, but I don’t think there’s any charitable deduction. It would be an interesting idea to have one, though, to divert inheritance to charities instead of to children.
2. David is right that the inheritance tax functions in practice as a tax on wealth, but it is not a wealth tax. We could say that each year, or each 10 years, wealth is taxed 10%, but we don’t (Sweden does, I think). Instead, we only tax at time of death. The current system in the US lets wealth be extremely unequal. It only prevents accumulation over generations, which doesn’t seem to happen in the US anyway— wealth gets dispersed over the generations, as the Rockefeller and Kennedy examples show.