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Trivia Tidbit Of The Day: Part 340 -- Death Taxes

Marxist Nonsense-

When I was in 9th grade, my Social Studies teacher really, really, really liked FDR. And there's nothing wrong with that. But as the year went on, her reasons for really, really, really liking FDR became apparent.

For her, it was the socialism thing. She was a socialist. Once, passingly, she fawned over the dramatically increased death taxes (from 20% to 45% to 60% to 70% to 77%) Franklin Roosevelt implemented in the 1930s. It finally evened the playing field, she asserted. How wonderful. How fair.

So I stopped her.

Aren't death taxes one of Karl Marx's 10 Communist Commandments (abolition of rights of inheritance)?

Don't they create massive inefficiencies by diverting so much capital into government coffers?

Don't they punish success, dissuade entrepreneurship, and undermine the importance of family?

Don't death taxes encourage rich people to spend their money gratuitously during their lives to avoid having it all confiscated at death?

Aren't a lot of farmers and small business owners considered "rich" because of the assets they have on paper, when, in reality, they lead somewhat modest lives?

And what about folks who have struggled (eating ramen and riding the bus) their entire lives, only to make it big at the very end? Is that fair to take away all (or even nearly all) of their money when they die?

Okay, maybe I didn't rattle off all of those particular questions. But I did ask several similar skeptical questions in rapid-fire fashion.

Her response had something to do with the death tax helping charities, helping everyone start life at a level playing field, and producing a great deal of funding for "the war" without hurting the bulk of regular Americans.

So, what about that last claim: does the death tax, which only hurts a few percent of Americans directly, produce any sort of windfall for the government, allowing lower taxes on everyone else?

The answer: No. Death taxes generate relatively little revenue for the government.

Indeed, the Tax Foundation notes that death taxes are not a big money maker for the government (.pdf):

The death tax currently produces <2% of federal tax revenues. Notice that under President Roosevelt that number rose in the beginning, then plummeted as people figured out ways to avoid paying it.

The Tax Foundation explains (.pdf) (underlining mine):

the estate tax has never been an important federal revenue source. In recent decades it has accounted for only 1 to 2 percent of federal receipts, and many economists argue that even this tiny figure may overstate estate tax revenues. Substantial evidence suggests the estate tax may actually raise zero or even negative federal revenue once the full economic effects of the tax are taken into account.

One reason the estate tax is a poor revenue source is that it encourages widespread tax avoidance. This avoidance in turn causes “revenue leakage” in the tax system. During life, wealthy estate holders face incentives to engage in complex estate planning to avoid estate taxation. This may include making gifts to children in lower tax brackets, making taxdeductible charitable gifts, or selling off assets while living in order to pay the current maximum 15 percent capital gains tax rate rather than the maximum 46 percent estate tax rate if assets are held until death.

More empirical evidence against the death tax (.pdf):

A 1994 study found that the estate tax’s 55 percent rate at the time had roughly the same disincentive effect as doubling an entrepreneur’s top effective marginal income tax rate.5 Thus, because of the estate tax an entrepreneur facing a 31 percent statutory income tax rate would behave as if he or she were facing an effective 62 percent income tax rate.

In other words, the death tax changes behaviors. Those changed behaviors are not good for the economy. One of those behaviors is the accounting-industrial complex that has grown up around minimizing/avoiding death taxes, not to mention just plain paying them (.pdf):

One 1992 study by economists Henry J. Aaron and Alicia H. Munnell estimated the cost of complying with estate taxes to be $1 for every dollar of revenue raised—nearly five times more costly per dollar of revenue than the notoriously complex federal income tax.

Taxes-- all taxes-- should be simple, low, straightforward, and foreseeable; that structure ought to be relatively stable, if not permanent.

Our economy needs to compete in a global marketplace. That marketplace includes more than ports and shops and factories and skyscrapers. It includes the marketplace of ideas. Of policies. Ironically, a wave of lowering taxes is sweeping across Europe today-- even in left-leaning countries. Much of Asia (Singapore, Hong Kong, South Korea, etc.) has had lower taxes for many years.

If we are concerned about jobs and American competitiveness, we can't let other countries beat us at our own low tax game. That includes income taxes, corporate taxes, sales taxes, death taxes, property taxes, import/export taxes, and every other category of taxes/fees/levees under the sun.

High taxes drive capital and individuals away. There's a reason "low taxes" and "pro-growth policies" go hand in hand. Anyone familiar with the concept of heat transfer understands that heat always flows to cooler spaces, away from hotter ones, when possible. Putting a piece of ice on your forehead on a hot day cools you off because you are transfering some of your heat to the ice cube, not vice-versa.

It's the same with high taxes. Just as energy flows from hot to cool, capital flows from high tax jurisdictions to low tax ones.

Let's repeal the unfair death tax. Let's keep fighting for lower-- and fewer-- taxes. And let's do it soon. There's an election coming up, after all.

Previous Trivia Tidbit: Gross State Product Differences Are Not Arbitrary.

Posted by Will Franklin · 7 June 2006 11:53 AM

Comments

Posted by: Margaret Rendall at June 7, 2006 01:10 PM

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Posted by: Zsa Zsa at June 8, 2006 08:20 PM