Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Thursday, April 2, 2009

Why the estate tax is evil

Estate tax

The following excerpts are from Arthur B. Laffer, Spend It in Vegas or Die Paying Taxes -- A 0% tax on carousing, but 55% on thrift, Wall St. J., April 2, 2009:

In most cases, people who inherit wealth are lucky by an accident of birth and really don't "deserve" their inheritance any more than people who don't inherit wealth. After all, few of us get to choose our parents. It's also arguable that inherited wealth sometimes induces slothfulness and overindulgence. But the facts that beneficiaries of inheritances are just lucky and that the actual inheritance may make beneficiaries less productive don't justify having an estate tax.

These same observations about serendipitous birth can be made for intelligence, education, attractiveness, health, size, gender, disposition, race, etc. And yet no one would suggest that the government should remove any portion of these attributes from people simply because they came from their parents. Surely we have not moved into Kurt Vonnegut's world of Harrison Bergeron. * * *

Advocates of the estate tax argue that such a tax will reduce the concentrations of wealth in a few families, but there is little evidence to suggest that the estate tax has much, if any, impact on the distribution of wealth. To see the silliness of using the estate tax as a tool to redistribute wealth, realize that those who die and leave estates would be taxed just as much if they bequeathed their money to poor people as they would if they left their money to rich people. If the objective were to redistribute, surely, an inheritance tax (a tax on the recipients) would make far more sense than an estate tax. * * *

Clearly, taxing estates at death will induce people who wish to leave estates to future generations to leave smaller estates and to find ways to avoid estate taxes. On a conceptual level, it makes no sense to tax estates at death.

Study after study finds that the estate tax significantly reduces the size of estates and, as an added consequence, reduces the nation's capital stock and income. * * *

Today in America you can take your after-tax income and go to Las Vegas and carouse, gamble, drink and smoke, and as far as our government is concerned that's just fine. But if you take that same after-tax income and leave it to your children and grandchildren, the government will tax that after-tax income one additional time at rates up to 55%. I especially like an oft-quoted line from Joseph Stiglitz and David L. Bevan, who wrote in the Greek Economic Review, "Of course, prohibitively high inheritance tax rates generate no revenue; they simply force the individual to consume his income during his lifetime." * * *

The estate tax in and of itself causes people to waste resources.

Special thanks to Patrick S. Sylvester (Attorney & Counselor at Law, Sylvester Law Firm, PC) for bringing this article to my attention.

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Comments

Arthur Laffer is, of course, the individual associated with the Laffer curve, i.e. the idea that increased tax rates reduce tax collections. The intuitively appealing idea has been roundly contradicted by empirical evidence, however.

Given Laffer's track record, his credibility on the tax revenue generated by the estate tax is not high. The estate tax does produce incentives documented in academic scholarship, but the incentives are largely demonstrated impacts on charitable giving levels, not impacts on wasteful consumption by wealthy people prior to their deaths.

There is however, ample evidence that large inheritances are squandered and reduce individual economic productivity. The authors of "The Millionare Next Door" have done a fair amount of research along those lines, as have researchers who have looked at the strong tendency of great fortunes to dissipate in a generation or two.

Posted by: ohwilleke | Apr 2, 2009 12:52:10 PM

He unintentionally provides an argument for the estate tax: if you're lucky in Vegas, we tax the winnings.

Posted by: jpe | Apr 6, 2009 7:31:17 AM

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