An Enemy of the Estate Tax 

Sept. 14 2000 11:30 PM

An Enemy of the Estate Tax 

Writing for Slate is fun and exasperating. It is nice to know you are being read, a fact evident from the speed with which many readers respond (though it does make me wonder how they spend their time). It is bothersome, however, to realize that I cannot answer every query or admit every mistake.

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My piece on taxes seems to have irritated a lot of you, especially the part about the estate tax (a k a the death tax). Some readers urged me to read the  article by Michael Kinsley in order to realize how wrong I was. I read it. I am not convinced.

Let me devote one more essay to this tax to try to persuade you that it does not help people achieve any reasonable objective. You still may want to keep the tax, but then you ought to admit that it is like writing an angry letter to Slate—it doesn't do much good but it makes you feel better.

Suppose you believe that wealth is too unequal in this country. There is hardly any evidence that the estate tax reduces that gap. This is the conclusion one reaches from reading most of the academic research, including that written by economists who do not like big wealth gaps. A recent article in the Public Interest summarizes the evidence. In all the many studies of wealthy people, only a tiny fraction of that money—perhaps 5 percent, rarely as much as 10 percent—came from an inheritance. The rest comes from running a business, saving money, and having some asset increase in value. Bill Gates, Warren Buffett, and Michael Jordan did not have rich fathers. Their children will be rich, but they will not be very numerous among the next generation made up of Bill Smith, Warren Jones, and Michael Dale, all self-made rich folks.

Alan Blinder, former chairman of President Clinton's Council of Economic Advisers, has concluded that the estate tax has so little effect on wealth that even a "radical reform of inheritance polices" would accomplish very little.

Even worse, it is not rich people but the descendants of rich people who pay the death tax. They can do this, albeit with much pain, if they get the entire inheritance in cash or other liquid assets. But they will find this hard to do if the inheritance comes in the form of a home, business, or farm. You can, of course, give money to your children and grandchildren while you are still alive, provided you don't give more than $10,000 a year to each youngster. That is easy—if you have a lot of cash. But people whose assets are tied up in a home, farm, or business that has increased in value may not have that much cash. I don't.

That is why the estate tax is called the death tax, and not just by reactionaries. It forces people to sell an asset in order to pay the tax on it. The sale destroys the owner's desire to see the home or the enterprise stay in the family. I cannot see how it is in the government's interest to say that John Smith's Chocolate Chip Factory can never become the John Smith Jr. Chocolate Chip Factory. It is an odd country that makes it so hard for a father and mother to leave their home or business to their children.

Now, clever people can avoid a lot of the estate tax by making gifts, buying life insurance, paying out charitable remainder trusts, and setting up even more complicated legal devices that protect some of their heirs. But who does these things? Typically, I think, the very rich people whom egalitarians would like to hurt. Do we want a tax code that penalizes people who are not rich enough or clever enough to figure out how to evade it?

The rest of the world has figured this out, and so they either have no estate taxes at all (as in Australia, Canada, and several other large nations), or they have tax rates that are about half as large as ours.

The argument that the estate tax helps redistribute wealth is false. But you can argue that we should tax the appreciated value of a person's wealth when the ordinary tax rates have not done so. Let's say you invest $1,000 to help build a clever new bit of software, perhaps calling it the Disk Operating System. Suppose you watch the $1,000 grow to something the size of, oh, say, Microsoft. You will pay taxes on any dividends you get but not on the wealth you accumulate. Your capital gains will not be taxed. When you pass this gain on to your children, its tax basis will be equal to its then market value.

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