As most of you know, I’m a big supporter of the federal tax on inherited wealth (the Estate Tax). I tried to explain my reasoning last night, but fell embarrassingly short. Fortunately, however, someone in today’s Washington Post made the argument much more eloquently than I ever could. Here’s a clip:
…Since 1980 the gap between the earnings of the top fifth and the bottom fifth (in America) has jumped by almost 50 percent. The United States is by some measures the most unequal society in the rich world and the most unequal that it’s been since the 1920s. What is the dumbest possible response to this? Identify the most progressive federal tax and repeal it…
But now the House has voted to repeal the estate tax, and the Senate may do the same this week. Republicans are picking up support from renegade Democrats, such as Blanche Lincoln of Arkansas, Bill Nelson of Florida, Ben Nelson of Nebraska and Max Baucus of Montana. Several more may go over to the dark side if a “compromise” bill, which would achieve nearly everything that abolitionists dream of, is introduced in the Senate. President Bush, who has already muscled a temporary repeal of the estate tax into law, would be delighted to sign a bill making abolition permanent.
If the abolitionists succeed, some other tax will eventually be raised to make up for the lost revenue. So which tax does Congress favor? The income tax, which discourages work? A consumption tax, which hits the poor hardest? The payroll tax, which is both anti-work and anti-poor? Really, which other tax out there is better?
Regardless of how you cut it, the middle class and the working poor will come out of this worse off than they were to begin with, and, in the long-run, our country will suffer for it. (Among America’s greatest accomplishments is the creation of the middle class, and we’re watching it slowly disappear before our eyes.)
11 Comments
M,
Not that I’m as smart about these things as you are–I’m not–but it seems to me that the estate tax hurts a lot of poor-to-moderate-income Americans. After all, it isn’t only rich people who inherit from rich people.
Personally, I favor abolition of income tax, as well (although I have to concede, it is the most equitable tax we have). I’d much rather see a significantly higher sales tax. The perfect solution? Not on your life. However: it would do away with the misery of tax returns, etc. And as Mercedes cost more than Fords, wealthy people would end up paying more. At least in theory.
ChelseaL,
From the Post article Mark referenced: “… only the richest 2 percent of households have ever had to pay [the estate tax] … under the law’s current provisions, a couple can bequeath $4 million without paying a penny to the government.”
I don’t know of anyone in my immediate or in-law family who has ever inherited more than an end table or old pocket watch. All of the grandparents savings was exhausted through hospice, health care, etc. My grandmother who had been finacially stable most of her life had $10 in her bank account when she died.
The problem with sales/consumption tax is that if a wealthy guy buys a Mercedes, it hardly dents his income.
My wife and I both work and are hanging onto the lower echelons of middle class. We have no real savings, no retirement. Every year, every penny earned is spent on food, shelter, etc. so every penny we earn is taxed twice (income and sales). Wealthy folks are able to stock a lot of money in storage bins. So the guy who buys a Mercedes for $100 grand may pay more tax on the car than the guy who buys the Ford, but, over the course of the year, the Ford owner is spending (and being taxed on) 100 percent of his income as he spends it all just to pay the bills while the extra thousands/millions the Mercedes owner earned gets banked tax-free (if their’s no income tax).
Unless the wealthy spend 100 percent of their income on taxable goods (as the paycheck-to-paycheck poor do) a consumption tax will always be regressive.
Inherited wealth is antithetical to Democracy. It’s a cancer that, if untreated, will
ChelseaL – the estate tax has traditionally helped the less well-off members of society stupendously. The people likely to be paying the estate tax – only a few thousand every year – aren’t likely to have poor relatives, or, at least, aren’t likely to acknowledge them. Repealing the tax is a nod to the Paris Hiltons of the world, and no help to you or I.
Keeping this tax on the ultra-wealthy, though, does more than just provide direct tax revenue. The indirect effect of the estate tax is to encourage the wealthy to set up charitable foundations – after all, reasons Carnegie, if my estate is going to be tapped anyways, I may as well ensure that it goes to building hundreds of libraries with my name on them!
Consider the amount of good that the C.S. Mott Foundation and Ruth Mott Foundation, both based in Flint, and the W.K. Kellogg Foundation, out of Battle Creek, do to provide education, health care, safe and sufficient food, recreation, and other opportunities to their communities and others throughout the country. I don’t mean to totally discount altruism (though I know enough social psychology and evolutionary psychology phds that I could), but the economic link between the estate tax and charitable giving is pretty strong. Do you want estates going to fund libraries, or Paris Hilton? Vaccinations? Or Paris Hilton? Pre-schools? Or Paris Hilton.
But, in the words of Geordi LeForgeLeVar Burton, “You don’t have to take my word for it.” Ask Bill Gates’ dad about the estate tax and the New Gilded Age.
(Hmmm….the “strike” tag doesn’t seem to work here. Oh well.)
If we could fund essential life, liberty, persuit of happiness functions of government … i’d go for a flat 12%-18% sliding flat tax, with cut-off at 1.5% offamily of four COLA (cost-of-living- allowance) and no cap … then get rid of everything else: sin, estate, cap gains, etc. VAT and Sales or “use” taxes would be better, exempting only those at 1.5% of the poverty level … and no cap. The tax on a new 1.5m Bugatti would feed a lot of folks.
Trick is to give the government less to spend on bridges to nowhere and regime change … remember Hawaii? Phillipines? Same old, same old.
You guys are way more informed than I am.
Of course, whatever taxation we have, the rich will fare better than the poor. Always have, always will.
One school of thought suggests that the rich fare considerably less well without heads.
ChelseaL – I think that’s kind of by definition, isn’t it? The rich fare better than the poor, or else we’d call them poor, and the other people rich.
Obviously, the overall bundle of taxation will have more impact on the poor than the rich, if only because the rich can find ways to out-maneuver the taxman. But, really, the Estate Tax is the one thing that falls completely on the very wealthy (a perfectly progressive tax), that doesn’t encourage negative behavior (income tax discourages you from doing extra work and bumping yourself up a bracket, but what’s the Estate Tax going to do? discourage you from dying?), and which encourages the rich to avoid it through charitable giving and legacy formation, rather than through off-shore investments and other dodges.
Overall, yeah, sucks to be poor. But the Estate Tax on its own totally hits the people who can afford it most.
God, I love you people.
Me too.