Monday, September 19, 2011

Some thoughts about inheritances

Proposals to eliminate the estate tax in the United States (also known as the inheritance tax) deserve no substantive consideration. Without an estate tax, the United States will expedite formation of an economic elite. Providing for some minimum amount to pass from one generation to the next (say, $5 million adjusted annually for inflation) and for a spouse or life partner who predeceases her/his spouse/partner to pass their entire estate to the remaining spouse/partner is reasonable.

In all other cases, the estate tax should be 100%. The federal and state governments should rescind all provisions for passing assets via trusts and these governments should tax gifts to family and others in excess of the $5 million at 100%.

In other words, assets remain with an individual (or couple) only during the generation that accumulated those assets. The necessity to impose death taxes (the United Kingdom’s version of estate taxes) to eliminate the economic elite in the U.K. is strong evidence in support of this policy.

Why take umbrage at this proposal?

The proposal is not a wealth transfer plan. Indeed, the plan is just the opposite. The accumulated wealth goes to government to fund general operations; without good government, living the good life is impossible.

The proposal allows parents to give a reasonable amount of assets to their children, honoring the natural care and affection that parents generally feel toward their children. The proposal also works to the children’s advantage by encouraging children to earn their own way in life, becoming productive members of society. The recommended ceiling for legal inheritances is sufficiently high to permit parents to ensure adequate finances for the care of any child unable physically or mentally achieve full financial independence.

The suggested ceiling is sufficient to permit true, family owned and operated enterprises (farms, factories, etc.) to pass from generation to the next. In fact, rhetoric about estate taxes preventing family businesses being passed from one generation to the next is mostly a shibboleth. The number of real family farms has dropped precipitously. Beyond a certain market capitalization (perhaps $5 million?), a business generally becomes more of an independent corporate entity than family concern.

The proposal may discourage individuals from accumulating vast wealth. By default, this inherently creates more opportunities for others. Alternatively, the proposal may result in more high net worth individuals donating their assets to charity.

Does this proposal seem radical? High worth individuals such as Warren Buffet and Bill Gates advocate similar proposals for the same set of reasons, perhaps setting the ceiling for assets passing from one generation to the next at a slightly higher level than what I have proposed.

What I fail to understand is why the vast majority of U.S. citizens, who have no realistic prospect of ever accumulating sufficient assets to trigger estate taxes, so vehemently oppose a policy that is in their, and the nation’s, best interest.


Chuck Till said...

I agree with your analysis and position. As to why people oppose a high inheritance tax, perhaps there are several reasons. 1, the middle class has been so squeezed in the last 25 years that inheritances are important to their lifestyle, if not their survival above the poverty level. 2, people feel like the property (real or monetary) is already "theirs" -- particularly in cases where it has already passed through several generations. 3, family businesses are a significant part of the economy, and uncertainty about the pass-down of family businesses is worrisome to those families.

Calvin Marshall said...

George, Thank you for putting these thoughts together. To the question you pose as to why most Americans oppose an inheritance tax of 100% in excess of $5M - my guess is that most people sense that such a measure would be tantamount to stealing on a grand scale. This seems to me a fairly reasonable concern, if only from a moral point of view. As to such an inheritance tax being at once in the best interest of individuals and society - this assumes 1) that government would effectively use those funds once gotten (this is not at all certain) and 2) no negative impact on the motivation of a business owner to succeed.

George Clifford said...

Thanks for your thoughts. Although an inheritance tax may feel like stealing, in fact it represents a legal taking to which the individual tacitly agrees by virtue of being a citizen in a democratic nation (this is Locke's concept of a contract forming the basis of community). Citizens through voting and participation in the political process have an opportunity to participate in governance. Representative democracy aims to be government of, by, and for the people. I think government makes good use of most of its funds (cf. Finally, I anticipate that you are correct about a stiff inheritance tax have a negative effect on the motivation of some business owners but am willing to accept that as a small price to pay for the tax's benefits. Other entrepreneurs will quickly fill any voids that a current business leaves unfilled (this is a basic tenet of capitalism), further broadening the distribution of wealth.

Calvin Marshall said...

George, thanks for your follow-up comments below. I agree with you, as you suggest, that being a citizen of a democratic country involves a tacit agreement to taxation. However, whether or not this should extend to inheritance seems an open question. Even if one concedes that a modest inheritance tax is in place, to cap what one can pass on to family at $5M still seems excessive, and in any case it’s not clear that this is the kind of measure that Americans have signed up for. Perhaps the larger question here is whether or not the US is progressively moving away (or even has moved away in some instances) from the limited form of government advocated by founding fathers to a form of socialism, where the government levels the social playing field. Maybe you are right, and by virtue of the kinds of leaders Americans have elected to office over the last 50 years or so, they have tacitly (maybe even openly) agreed to a more socialist form of government, and then Americans should hardly be surprised if an increased portion of their income should wind up with the US Treasury. I read your blog referenced in your latest response and although I agree with you that there are many good things that government does which benefit the population at large, I think a counter (balancing) argument to your assertion could be found in the funding of Middle East wars as well as a sizable portion of “pork barrel” spending. It may also be that eventually a government reaches a fiscal tipping point beyond which there would be a correlation between an increase in tax revenue and a decrease in efficiency in distributing that revenue.

George Clifford said...

Ending the wars in Iraq and Afghanistan (and the associated costs) will obviously help the U.S. government’s fiscal position. You’re also right that our government has changed (because what people want has changed) since the late eighteenth century to the present. The issue is not whether to have limited government (only a few extremists opt for the extremes of anarchy or complete government control), but where the right balance between individual freedom and communal authority (as expressed by the government) exists. I want to live in a society that has a strong social safety net, ensuring adequate care for the elderly, the chronically ill, children, etc. That takes money. I also want to live in a society that values all equally, regardless of economic status, which necessitates ensuring that excessive resources do not flow from one generation to the next (hence the need for a strong inheritance tax).

Calvin Marshall said...

George, I can appreciate your perspective and desire for a strong social safety net. One of the things I’ve noticed in France, having spent some time there with my wife, Karine (who’s a native Parisienne), is the emphasis on friendship, family, culture, and the art of living. Some of this no doubt comes from the strong social safety net in place in France, where people are not as driven in their daily lives by the pursuit of money, and so have leisure to devote energy to things of lasting value. The down side, of course, can be a decrease in innovation and slow economic growth, which has its own set of problems.

George Clifford said...

The downsides of a strong social safety net that you identify (negative effect on innovation and motivation) certainly exist. The challenge is to strike the appropriate balance, devaluing neither social nor individual responsibility. The location of that balance is an important political question that generally gets lost in American political rhetoric, which tends to be more polarizing than effective.

Ted said...

This idea is just wrong. If $5 million is too high, why not lower it to 500,000 or even lower so all of us can help the poor who may too lazy to improve their position in life. Yes there are many reasons why they are behind the eight ball; but if they WANT to get out of poverty they can. It will not be easy, especially if we want to divide other’s property among those who don't deserve it. When we take the money from the rich to give to the poor, where is the initiative for the impoverished majority to improve?
With so many single families and fatherless children in our society, we might start there to help create an atmosphere where having a nuclear family means you are more likely to succeed in life. Currently we only think about the compassion in these situations and all the government money has not made a difference.
Why does the church not sell all its assets and help the poor? Church services can be held in any location, under any roof and without any property.
So when churches give the government their assets over $5 million, then I might reconsider my position.
We really fall behind initiatives and ideas when they don’t affect us. When the Warren Buffets and Bill Gates give away 99.9999999% of their wealth and donate all of their future income to the government, then I might listen to their ideas.
As far as I can remember, Jesus never gave away his wealth to the government.

George Clifford said...

Warren Buffet and Bill Gates are giving away most of their wealth. Both men believe that their children should not inherit outsize amounts. Church endowments are comparable not to individual wealth but to the endowments of other non-profits, e.g., private colleges and universities. Enacting a strong inheritance tax is not a panacea; the tax will not fix problems associated with nuclear families nor will it motivate the poor to work, for example. However, enacting the type of inheritance tax that I advocate is part of the solution by setting limits on the influence of wealth and undermining the emergence of a permanent upper class defined by wealth passed from generation to generation.