01 January 2008|
Facing Certain Death Taxes
Why inheritance taxes are the fairest and most efficient tax system
When we take a real look at the current tax structure of the United States government we must ask ourselves a few simple questions. "Why are we taxed?" "How are we taxed?" "What are our notions of justice and fairness as they relate to taxes?" "Is our current tax system living up to these notions?" In thinking of these fundamental questions (perhaps questions we do not examine often enough), I hope to show why our current system is flawed, failing, and how we might seek to change it.
Why are we taxed?
Public goods, things individuals cannot possibly provide or be expected to provide for themselves, are an essential component of society. These range from a stable currency to public roads and parks to national security to the rule of law. And while the private sector can provide solutions to some of these problems that a government will inevitably be necessary to provide these essential goods seems incontestable. The purpose here is not to establish how we should spend tax revenue, but instead to agree upon the assumption that taxes are a necessity.
How are we taxed?
Taxes are a mess. We pay taxes when we buy groceries, when we buy a new car, every two weeks on our paychecks, when we buy gas, when use electricity...we are generating revenue for the federal, state, and city governments every single day of our lives. That we pay taxes every day of our lives leads some to conclude that people should be able to die without worrying about taxes. Inheritance tax, or as its opponents aptly frame it, "death tax," is a tax levied on the estates of people when they die. The Republican Party has attempted to phase out the estate tax for one year, 2010, after which a new estate tax would be implemented. Before you go pushing grandpa down the stairs in four years, it is obvious that a temporary amnesty will inevitably lead to a permanent elimination. At least that is the desired result for those in favor of this one year tax exemption.
The most interesting facet of this discussion is that the Republicans have shaped this debate as one of fairness and equity. One of the leaders in the fight to repeal the inheritance tax, Rep. Kenny Hulshof, notes that death "should not be a taxable event." The current inheritance tax applies to estates valued at over 2.0 million dollars, only two percent of the nation's population. Furthermore, when the House Republicans passed this bill a year ago, a Democratic bill lifting the value necessary to tax an estate to 3.5 million dollars (at 3.5 million dollars only a fraction of one percent of the population would have been left with an inheritance tax) was soundly defeated. It is obvious that the Republicans want to eliminate all forms of inheritance tax, but is this really the most fair and practical solution to begin reforming our convoluted tax system?
What are our notions of justice and fairness as they relate to taxes?
Irrationally, most people want to increase services while decreasing taxes. However, when pushed, most people would opt for lower taxes if forced to choose between the two. People are also committed to the idea of the American dream. People want to believe they can pull themselves up by the bootstraps and become lawyers, doctors, businessmen, or inventors. It follows that these people are seen as hardworking and deserving of the fruits of their labor - the bigger paycheck these positions carry. The majority of people believe in self destiny and reward for hard work and ingenuity.
Most people also believe in some notion of John Rawls' veil of ignorance. Yet our current system fails to meet this key criterion. While the wealthy may appropriately be expected to pay more in taxes (both as a percentage and in real dollars), our current tax system hurts those contributing most to the economy and to society as a whole while rewarding the unproductive offspring of past innovators and wealth generators. While both Democrats and Republicans have their clear constituencies - poor people in need of government assistance and subsidization and wealthy fatcats attempting to protect their money after they are dead and gone - no one is thinking about the overwhelming majority of people who do not fit into these categories. Thus, while some key conceptions of justice and fairness may be agreed upon by most individuals, our government and political parties are failing to live up these shared values.
Is our current tax system living up to these notions?
Clearly not. As with all political decisions, we should not be forced to choose between the lesser of two evils. At this point, both Republican and Democratic solutions are inadequate and biased. Republicans would eliminate all inheritance, keeping wealth concentrated in the hands of people who did not contribute anything to society while Democrats would continue to tax inheritance but would also not attempt to reduce the income tax, providing no relief to those who are actually contributing most to society. What I am proposing then is that we take a long, hard look at income and inheritance and decide which is the most appropriate place to levy taxes. Undoubtedly, the revenue potential from inheritance cannot completely counter the current revenue intake from income tax. However, the potential may be greater than most think. Currently, the top quintile of income earners pays over 80 percent of the federal income tax.
The federal income tax generates the single largest amount of revenue for the government at nearly $1 trillion annually. The huge majority of this revenue comes from the wealthiest twenty percent of society. This twenty percent of the population is made up of doctors and other professionals, innovators and creators - the people really shaping the society we live in. It seems unfair to tax these people at more than 1/3 of their income. In fact, with all the taxes in our society, the average person in this top quintile of income earners keeps only slightly more than half of his or her income. This seems unfair to those who are in a position to shape society most.
A better solution would be to tax those who inherit large sums of money. Although some tax free minimums for estates should continue to exist, it would seem most fair to implement a steep progressive tax on inheritance. While many scholars have debated the economic and moral implications of progressive income tax, inheritance tax truly yields itself to being entirely progressive. There should be some minimum of tax exemption for estates - let's say the current $2 million minimum. After this point, tax brackets similar to the failed tax brackets of income tax should be put into place. For example, estates valued between $2 and $5 million might be taxed at 15 percent, estates valued between $5 and $10 million might be taxed at 25 percent, estates valued between $10 and $20 million might be taxed at 40 percent, and so on and so forth. The underlying thinking here is that those who are making large sums of money, ideally contributing most to society, are allowed to keep a far greater portion of their wealth while those who simply inherit large sums of money are forced to pay high tax rates on their exorbitant inheritance. This should make it possible to drastically reduce the income tax rates and perhaps even lead to a more equitable tax scheme, such as a flat tax.
While Bill Gates has most certainly shaped the course of modern society, his children have not. It makes sense that Bill Gates should be allowed to enjoy his vast wealth, but how does it make sense that his children are entitled to that same sense of enjoyment? If we really take Mr. Rawls' veil of ignorance seriously, we would all agree that those who create and generate wealth are more deserving than those whose parents or grandparents or in many cases, great great grandparents, generated such wealth. It follows that we should substitute as much of the federal income tax possible with taxes from inheritance. While Ben Franklin most appropriately declared that "In this world nothing is certain but death and taxes," perhaps within our tax system nothing should be more certain than the death tax.
The above work is the opinion of the author, and not necessarily that of the Prometheus Institute.