Like many wealthy individuals off of Hacker News, you more than likely have a Roth IRA account that houses Vanguard mutual funds. John C Bogle (or Jack Bogle), the founder of the Vanguard Group, has consistently and wholeheartedly supported the estate tax as a time-tested means of reducing income inequality. The estate tax has a deep and lengthy history stretching back centuries and (unfortunately) there is a dearth of economic data pointing to it being beneficial to society. It is nonetheless important to emphasize the mutual respect and shared responsibility between the wealthy and non-wealthy.
I am by no means a rabid Communist but rather a right-leaning individual that feels strongly about this subject -- there is most definitely precedent for the estate tax's usefulness. The basis of the argument against the estate tax is capital flight and that is just a weak red herring that ignores how immobile most wealth is.
That's an assertion that's often repeated axiomatically by non-economists, but it's not borne out by the data. Aside from the fact that the estate tax raises embarrassingly little revenue, the number of individuals who actually pay the estate tax is pretty low. Furthermore, it's inherently a tax that doesn't capture the true benefits of inherited wealth, and there's no way to to turn death into a taxable event that does - even if you imposed an estate tax of 100%.
Friedman has written an entire book explaining why the estate tax is inherently broken and unfixable. His criticisms of the estate tax are only controversial politically; they are generally accepted by economists, even those that don't advocate repealing the estate tax for other reasons.
> and there is a dearth of economic data pointing to it being only beneficial to society.
I'd agree that there's a dearth of economic data pointing to the benefits of an estate tax.
 $19.3 billion, which is about half a percent of total federal revenue, and not nearly enough to make a dent in wealth inequality
A paper published in 2000 "began with an aggregate time-series analysis, and found that summary measures of the estate tax rate structure are generally negatively correlated with the reported net worth of the top estates relative to national wealth," which "is consistent with estate taxation reducing either wealth accumulation or inducing avoidance, or both" .
The simplest strategy for avoiding the tax involves gifting. "A couple with two children could divest itself of $1 million over a twenty-five year period simply by taking advantage of the gift tax exclusion" . That grows if the couple contemplates gifts to grandchildren, spouses of children or grandchildren, et cetera. Another involves the "diversion of profitable investment opportunities" to heirs, e.g. by "arranging profitable business deals and then bring[ing] their children in as coinvestors". Lending to children at prevailing rates and guaranteeing their loans are related strategies. More sophisticated techniques include "preferred stock recapitalizations in closely held firms, installment sales, and life insurance."
TL; DR The estate tax does little to reduce inequality.
On a more meta level, it is interesting to observe that for "several decades, total revenues raised by estate and gift taxes have roughly equalled those raised by excise taxes on alcohol and tobacco" . The estate tax attracts attention because of a fundamental disagreement, regarding taxes, in our politics.
"Broadly speaking, the tension is one between a desire for structural tax reform, which would move the tax system to- wards greater horizontal and vertical equity, and a desire for tax provi- sions designed to stimulate increased savings or capital formation. This tension produces a direct conflict between the need to tax capital or the income from capital in order to achieve a progressive tax burden and the perceived need to exempt capital and capital income from tax in order to induce economic growth" .
That's correct - as per the very first point in the article, people structure their assets to minimize their estate tax liability.
> On a more meta level, it is interesting to observe that for "several decades, total revenues raised by estate and gift taxes have roughly equalled those raised by excise taxes on alcohol and tobacco" . The estate tax attracts attention because of a fundamental disagreement, regarding taxes, in our politics.
I'm not really sure why that's relevant? Unlike estates, we don't tax tobacco because of a desire to generate revenue or reduce wealth inequality. Tobacco taxes are actually incredibly regressive: the burden of the taxes is almost entirely paid for by the poor, so they increase inequality. But we tax it regardless, because we believe that the taxes contribute to a decrease in smoking nationwide.
The author is contrasting the disparity in attention given two two relatively-minor taxes with similar economic burdens.
> we don't tax tobacco because of a desire to generate revenue or reduce wealth inequality
Tobacco taxes are absolutely marketed as revenue raisers. They aren't intended to reduce inequality, but another perceived societal ill--tobacco use and nicotine addiction.
The economic burdens of the estate tax and the tobacco tax could hardly be more different. One is explicitly targeted exclusively at the very wealthy, and the other is effectively (though not explicitly) targeted at the poor.
> Tobacco taxes are absolutely marketed as revenue raisers
I'm not really interested in how they're marketed; I'm talking about the economic policy-driven justifications for them.
> They aren't intended to reduce inequality, but another perceived societal ill--tobacco use and nicotine addiction.
That's the Pigovian tax argument, which again, is completely different from the estate tax argument.
>> I'm not really interested in how they're marketed
You're either being obtuse or didn't read my original comment and think I'm disagreeing with you. If Policy A is marketed as way to do X, it was passed, in part, as a reflection of a desire to do X.
At face value from keeping it from the government, yes. However, it also distributes the money out of a single controller. This is actually huge, as it more quickly loves the money out of any sort of dynastic entity. Even removes some incentive from families for having to operate as a single unit.
2) If you can't decide what to do with your money, you have less incentive to work hard for it.
3) If your choice is either to spend your money frivolously or have it expropriated, you'll spend it frivolously.
4) Distorting savings and investment decisions is one of the most damaging forms of taxation. A tax on inherited wealth is a tax on savings.
5) It's very difficult to write down a theoretical utilitarian welfare model that suggests an estate tax is a good idea. (It's easy to write a model where inheritances are optimally subsidized.)
What about the money that I earn via direct income?
Why don't I have a right to all of that as well, considering the payroll tax or income tax?
Surely the government has no right to confiscate the direct value I know I've created.
How about this: it's a form of multiple taxation. You pay income taxes when you earn the money. You pay taxes when you bequeath it to your children. Your children pay VAT taxes when they finally spend it. It's inefficient and unnecessary.
All but four states in the US have a general sales tax
From an economic standpoint, yes, a sales tax literally is identical to VAT. The difference is in the point at which the payment is collected; the incidence of the tax is absolutely identical.
> even what in the US is called a “general” sales tax applied to a far more limited set of end products than a VAT would usually apply to.
That's really not true at all.
That is the estate tax. If don't have estate tax, then capital gains are never taxed.
Currently, the tax basis for capital gains is stepped up to current value when inherited. It would be reasonable to not require capital to be sold to pay estate tax. That could be accomplished by not resetting the basis on inheritance.
Evidence does not bear out this assertion. The Rockefeller Trust is a well documented example of a huge inheritance that was not subject to an estate tax. The common and relatively simple solution to the estate tax is to create trust fund(s) to hold the money.
The name John D. Rockefeller has long been associated with immense wealth. In his book Outliers, author Malcolm Gladwell estimated the value of Rockefeller's fortune at its peak, in today's dollars, at $318.3 billion. You read that right: John D. Rockefeller, the founder of Standard Oil, was over three times richer than Bill Gates is today.
You may know that upon his death, the majority of John D. Rockefeller's wealth went to his only son, John, Jr. But in reality, things are a bit more complicated. In fact, a trust was created, as well as several other entities designed to manage the family money, all to ensure that Rockefeller's descendants continue to live as only Rockefellers can.
The Rockefeller fortune would have never materialized without the foundation of public laws, public education, and infrastructure that formed the bedrock of American industry in our grandfather's time -- this bedrock continues to support vast fortunes to this day.
If the goal is reducing inequality, the estate tax is an inefficient battleground. It's politically-expensive territory and policy-wise ineffective compared to e.g. raising the top tax rate or eliminating the carried-interest deduction.
(I have come to this conclusion grudgingly, as someone who believes oligarchic dynasties are bad.)
Any source for this claim? Comparison of countries with and without estate tax and their wealth inequality? My impression was the data was quite mixed
Possibly you meant "wealth" of data?
While there is a lack of supporting data, the intent is important.
As for the content, this letter gives no evidence of its claims, and simply relies on the emotional power of the phrase "death should not be a taxable event". It makes vague, unsupported assertions about the effect of the tax on saving, the cost of enforcing and collecting the tax, the amount collected by the tax, and the prevalence of avoiding the tax. Without actual numbers, though, it's impossible to argue with effectively, which is exactly the point of this rhetorical style.
The letter also falls into the narrowly hyper-rational trap of elevating vague economic principles to the level of an absolute moral stance. Just because some policy doesn't meet a completely artificial and oversimplified ideal of economic efficiency doesn't mean it's definitely the wrong policy. The real world is more complicated than an economic model.
Ultimately, the most important thing to understand is that this letter was a political statement in support of George W Bush's proposed tax policy in 2001, and not a serious argument. The content is no basis for a reasoned discussion of estate tax policy; it's a propaganda piece.
You're demanding a lot for a 325-word letter. The author of the letter has written multiple books and papers on this topic in great detail. If you're looking for formal analysis that supports the claims, that's the place to look for it, not this letter.
The main points they offer for why are `the estate tax wouldn't raise much money anyway because estate planners have hid the money well` and `it's too hard to enforce`.
Doesn't feel like a very nuanced argument.
So the real question to be raised by this letter is, does inequality matter, and if so how much does it matter and more precisely how much does it cost society as a whole. Maybe a yearly wealth tax for all people (natural and legal) of 0.1% would work better? Such a tax in the US would raise between USD40B to USD45B a year.
No, it wasn't.
I'm not entirely against dynasties, but it does seem against original US ways. This is definitely a return to policies that can allow a landed gentry.
Specifically, they set up policies to benefit themselves. They did not establish their families as the royalty of America.
That those with land and power get to use said power is fine. And I never claimed that was against values. That they establish dynasties where the main accomplishment is simply birth to a rich name is where I question things.
This point is no less worthy of discussion, but it is a different discussion. Oddly, I would think fixing either would gain advantage from policies such as the estate tax.
I'm curious on how it applies. I have not been bringing in new questions. I can see how I probably left it too ambiguous in the start. I have not been trying to change it, though.
Simply having property escheat to the government at death would seem to address the only real, non-moralistic argument raised by the letter: that the estate tax is expensive to administer but doesn't raise much revenue. Of course, people would probably arrange for inter-vivos transfers instead. That would be fine, because such transfers would be taxable income to the recipient (presumably, while we're getting rid of inheritance, we can get rid of what we call "gift income" which is really just regular income).
There is precedent for it:
> Thomas Paine, like [Adam] Smith and Jefferson, made much of the idea that landed property itself was an affront to the natural right of each generation to the usufruct of the earth, and proposed a "ground rent" — in fact an inheritance tax — on property at the time it is conveyed at death, with the money so collected to be distributed to all citizens at age 21, "as a compensation in part, for the loss of his or her natural inheritance, by the introduction of the system of landed property."
There is a certain libertarian appeal to the idea of property rights ending at death. Maybe there is a "natural right" to property. But surely there is no "natural right" to have a whole apparatus of government dedicated to carrying out the wishes of dead people.
Of course, those recommending the repeal of the estate tax are also probably of the opinion that wealth concentration is not a problem.
In my opinion, a wealth tax (of which estate tax is one example) is much fairer than an income tax. It is somewhat difficult to levy, but I don't think it's inherently more difficult than measuring income for income tax. It's just that we've spent a century working on income monitoring laws and regulation.
Honest question: Have you had more luck?
If you add to that an exemption of the higher of 5% of income or $20k--so as to not punish people for having a reasonable savings rate--and progressively tax the remainder, that seems pretty "fair" to me (aside from the question of whether any tax can be truly fair). Those who end up paying it are only the ones who can afford to pay it, and they pay in proportion to the extent to which they benefited from the economy.
This kind of tax, like any other, also has possible unintended consequences.
> the earnings on the assets were taxed year after year
Given the stepped up basis upon death, gains accrued during life are never taxed.
It seems to me, as usual, that small business owners (their progeny, that is) are the ones who get screwed by estate tax.
Full disclosure: I am not a small business owner, but my father has been for nearly 30 years. I anticipate that my younger brother, who works in the family business, will be more affected by this than I will be, so I consider myself fairly objective here.
In our example, my parents are doing fine, but they are by no means a "wealth center". My dad worked hard building the business. It took about 20 years for him to see meaningful profit (it's manufacturing).
So the problem as I see it is that my parents (like other small business owners) have the majority of their "wealth" tied up in the business. So the business would need to be dismantled in order to pay the estate tax, which leaves my brother (also working hard) in a tight spot.
I'm sure that there are ways around this, and hopefully they are thinking about that. I know that at some point there was a large life insurance policy meant to cover the tax.
Sure, it's still redistribution of wealth, but us folks in the middle are the ones that feel it. The top dogs will still pass most of it on.
The company then trades shares of stock for life annuities of equivalent present value. Essentially, the company starts a pension plan for its owners. As long as they still live, the parents take pension payments, in lieu of dividends or distributions, and the kids gradually build up equity by "working" in their executive positions. The pension benefit appears as a liability on the balance sheet, depressing on paper the basis of the privately-held company stock.
When the parents die, their beneficial interest in the form of the life annuity is terminated immediately, without any intervention by an executor or probate judge. That cash flow from the company is now freed up for dividends. The value flies from the present value of the life annuity to the stock price of the company that no longer has to pay it, just as the last breath leaves the body, so fast that the taxman cannot catch it. The kids will realize a capital gain if they ever sell their stock, and will see a rise in dividend income going forward. This increase in wealth would be the same size as a normal inheritance, but does not trigger taxation until they sell the stock, and avoids estate taxes entirely. Income tax is paid quarterly.
This is fine. The estate tax earns the government no revenue. It served its purpose by encouraging the elder generations to yield their power over the family businesses before they die.
I think we should apply a death tax only to dead people. A 100% tax on post-death income to the estates of the dead. That should speed up the settlement process.
If it really was an "inheritance" tax, then each person would have an "inheritance tax allowance", that is the amount they are allowed to inherit before the taxes start. So if 20 of my ancestors all kicked the bucket at once, each leaving me a modest fortune that adds up to a large total, then I would be liable for a hefty inheritance tax bill. Whereas, if great aunt Mabel died and left $1000 for each of her 1000 progeny, then no tax would be due, as surely a measly sum like $1000 would fall below any reasonable inheritance limit.
The "death" or "estate" tax is levied on the value of the assets of the person who died, not on the value of the amount received by an individual who inherits. Ergo, it's a death tax.
Small nitpick: It isn't a "gift of $22 million" but a bequest. If gifts of 22 million were allowed free of tax, then absolutely nobody would ever pay inheritance taxes. The current annual limit for non-taxable gifts is $15,000 per recipient.
Wonder why wealthy US families like having lots of grandkids? Because each can receive 15K into their trust fund tax-free from each elderly relative per year. Amongst established families this is the primary means of moving money between generations. And if you are pregnant now, getting the baby born before Monday means a 15K bonus that it won't get if born on Tuesday.
Your reasoning about the allowances is backwards. If you lose a parent, an uncle and a grandparent all in one year, and get $22 million from each, then you have had a $66 million dollar "tax allowance". There's only one of you, but there are 3 deaths, so $22 million per death, ergo, a death tax. Conversely, if you work for 3 companies, you don't get to consider each income separately and pay only the bottom bracket of income tax for each of them; you pay the bracket that is appropriate for your total income, because it's an income tax, not a having-an-employee tax. (in the UK we also have a 'having-an-employee' tax, but that's handled separately).
What if they provided a comfortable lifestyle for their children? Would that just be taken away by the government upon the parent's death?
I agree that it should be paid as an income tax, at the appropriate tax bracket of the inheritor. If it stays within the estate, then at the relevant income tax bracket for the estate.
If there isn't any income tax on estates, then I see your point and that should definitely be changed.
As we live longer, we're also able to have children later, and I know many people in their twenties who have had parents pass away or expect it to happen soon.
Nonetheless, with enough kids, that money doesn't go terribly far in the Bay Area.
What about sales/excise/VAT taxes? This letter seems disingenuous at best.
2) Sales/excise/VAT taxes are still collected whether it's the parent or child who is spending the money. It's symmetrical and doesn't treat one moment in time or one generation differently than another.
"An exceptionally productive individual can generate billions, but then when he dies the money goes to his heirs which may not have done anything to deserve commanding that much wealth other than having been raised by (and having the genetics of) the exceptionally productive individual, which is a far cry from being exceptionally productive themselves.
My thought was to create a cap on inheritance. Enough so that the heirs would be able to live a normal middle class life without working, but not be disgustingly wealthy like the parent. ~$5 million seemed like enough to live off interest for a lifetime. I don't think productivity would be disincentivized too much by this, as the productive individuals still get to use their wealth as long as they're living. It'd probably be pretty difficult to plug all the loopholes but I think it's worth thinking about.
We could lighten some other taxes (income, property, whatever) for this increased death tax such that the overall government tax income remains roughly the same, to make the proposal more palatable. Overall, everyone keeps more of their wealth, and the playing field is leveled and we're a bit closer to an actual meritocracy."
Simple, and successful businesses survive it.
Now a) have these people never heard of VAT? b) every last bartender, private jet pilot, jazz musician, minder and hooker said wastrel interacts with pays taxes. The truth is, the playboy billionaire is way better for the economy than the upright citizen who sits at home on a pile of money.
And... the author knows this. He’s just hoping that cheap moralism will get you to agree with him when actually it’s part of a programme of action where he doesn’t disclose his actual motivations.
I said dumb at the start, dishonest would be more accurate.
They reject this idea of "collective fairness" because individuals' rights are much more important than the rights of the collective.
Also, I'm now dying to know how many economists in total have an opinion on estate taxation. They ought to know better than anyone else that sometimes proportions are more significant than absolute values.
My own, not-an-economist opinion is that the estate tax is bad, only because it waits until someone has died before making an intervention, then tries to do too much, all at once, and probably too late to make a difference. The letter is correct in that death should not be a taxable event. The tax should probably be invoked every time wealth is transferred from an elder benefactor to a younger, adult recipient, and defined such that all the trusts and offshore accounts and sham business arrangements are transparent to the taxing authority. If your "job" is to be an executive assistant to mommy or daddy, and for that you earn six figures, then the taxing authority should be able to determine the amount paid in excess of the median executive assistant and levy the nepotism tax on that. The idea is not to make money, but to discourage certain behaviors. If the rich people avoid the tax by employing their peers' children instead of their own, that's fine; it gives those kids the opportunity to work for a boss that won't cut them slack just to avoid awkwardness at the holidays.
The estate tax isn't just a tax on a parent's hard work and success. It is a tax on spoiled little rich kids, who never learned the value of actual work in the economy, who then go on to own companies and control what people do in them. It's a tax on being disconnected from the conditions experienced by lower classes, wherein it is essential to earn what you get, rather than accept whatever it is you think you deserve as your birthright.
I don't begrudge rich people their ability to provide additional opportunities to their children. But when their children turn out to be aristocratic twits, I also feel the desire to teach them the hard lessons that the rest of us likely got much earlier in our lives, to perhaps make them better, more empathetic people. And those are lessons best learned by not having so much money that self-discipline and self-sacrifice are never necessary. I get the feeling that fewer people would be laid off by stack ranking or to shore up quarterly results if those doing it had some inkling of what it means to be the one laid off--the panic, the fear, the depression, the austerity, and maybe even the irrational optimism.
Ideally, everyone should get the experience of working a low-wage job for unskilled labor between the ages of 16 and 21, and a job that barely makes ends meet between 21 and 25. It teaches you the unmitigated constant panic of being a responsible adult in the real world.
If you have already walked your mile in poor-people's shoes, and you then go on to negatively affect other people's lives using your parents' money, then at least it won't be because of ignorance.
So perhaps if you work at least 32 hours every week, your immediate exemption is median individual/household income minus your earned gross income, with an additional deferred exemption equal to your earned gross income, starting 7 years later and repeating every year until your death, but capped at 10 times median income for your filing status.
As an example, here is the work history of a child of a very rich person--one who has a perfect aversion to paying the rich-kid tax:
Year Age Filing Earned Immediate Deferred Income
1 18 single $15k $17k $0 $32k
2 19 single $16k $16k $0 $32k
3 20 single $17k $15k $0 $32k
4 21 single $18k $14k $0 $32k
5 22 single $20k $12k $0 $32k
6 23 single $45k $0 $0 $45k
7 24 married $55k $4k $0 $59k
8 25 married $60k $0 $15k $75k
9 26 married $63k $0 $31k $94k
10 27 married $65k $0 $48k $113k
11 28 married $67k $0 $66k $133k
12 29 married $68k $0 $86k $154k
13 30 married $0 $0 $131k $131k
14 31 married $0 $0 $186k $186k
15 32 married $0 $0 $246k $246k
16 33 married $0 $0 $309k $309k
17 34 married $0 $0 $374k $374k
18 35 married $0 $0 $441k $441k
19 36 married $0 $0 $509k $509k
20-38 37-55 married $0 $0 $509k/yr $9671k
Even working at minimum-wage jobs for 40 years eventually caps the deferred exemption amount.
It reads likes the latter, but the more interesting discussion is regarding the former.
The general consensus from economists opposes the estate tax. There are a few aspects of its implementation that are particularly problematic, but there's no way to implement an estate tax that doesn't ultimately either (a) lead to these sorts of outcomes, or (b) defeat the entire point of an estate tax in the first place.
The short letter might read like it's arguing against the implementation, but if you're familiar with Friedman's work, he shows why estate taxes inherently lead to such undesirable outcomes.
Not really, in the general case, but definitely not on the topic of the estate tax. It's actually quite hard to find rigorous economic analysis and research that defends the estate tax.
> I thought [the free market US school of economics] was on the retreat in recent years?
That's definitely not true. The current political tide is towards taxation and regulation, but politics have very little to do with what economists agree on (much to their chagrin), and politics is highly cyclical.
Also, I'm not sure why "US" is in there - it's not like free-market economics is advocated particularly strongly by US economics compared to their foreign counterparts. Again, politics and consensus among economists are not the same thing.
I confess I'm predisposed to keeping it. My mindset doesn't see it as a "death tax" and my contrarian mindset may dislike the idea of repeal from the marketing that went into that label.
So as to allow minor things, such as a house, to pass from parents to children, a low level exemption is reasonable, so the tax does not touch the poor or middle classes. Suppose the first $5 million are tax-free. That is more generous than the current system, and since $5 million is too small an amount to lead to oligarchy, it should not raise any concerns. But beyond $5 million, the appropriate tax should be 100% -- all of the wealth should go back to the society from whence it came.
The money raised from such a tax can help give poor children something to start with in life, and thus such a tax allows each child of each generation to start off with roughly equal assets. Thus everyone's accomplishments in life become truly their own, rather than being partly their own and partly their ancestors. The over-reliance on ancestors is a sad state of affairs that holds for many children of the wealthy.
The UNHCR also has Article 17(2) (2) No one shall be arbitrarily deprived of his property
As to UNHCR, obviously none of us would ever suggest taking someone's property arbitrarily. What I am suggesting is a tax, which would work just like any other tax, and would be just as lawful as every other tax that you pay.