Explore Freedom

Explore Freedom » Kill the Death Tax

FFF Articles

Kill the Death Tax

by

ARE WE SUPPOSED to be impressed that some of the country’s richest men want the government to continue taxing estates? I don’t see why their opinion on this matter is worth more than anyone else’s. After all, just because someone is good at making money, that doesn’t make him an authority on economics or ethics.

But Warren Buffett, George Soros, David Rockefeller, William Gates Sr., and several others with deep pockets say it would be wrong to phase out the death tax, which can take up to 55 percent of an estate and force the liquidation of businesses and farms. These men fret that repealing the tax would reduce charitable giving, impose burdens on the nonwealthy, and establish a plutocracy by letting the rich pass their wealth on to their children.

Do these arguments have any merit? None at all.

Buffett et al. claim that if estates are not taxed, people like him won’t give as much to charity. In other words, charity is merely a tax shelter. Perhaps they should speak for themselves. In the 19th century, before there was an estate or income tax, the wealthy gave huge sums to charitable causes of all kinds. In the 1980s, when top income-tax rates were cut substantially, philanthropy soared. Apparently, rich folks give money out of generosity, tax considerations or no tax considerations.

But even if it were true that giving would drop with repeal of the death tax, so what? In a free society the government should not use the tax system to manipulate people’s behavior. Stimulating charity is a poor reason to impose or maintain a tax.

The argument that getting rid of the death tax will burden the rest of us is also weak. True, if other taxes are raised to make up the revenue, that would be harmful. But there is nothing automatic about raising other taxes — and there is no need to do it. Trillions in surpluses are anticipated, remember?

Moreover, the federal budget — approaching $2 trillion — should be slashed dramatically. And in any case, the estate tax brings in relatively little money ($28 billion in 1999) — mainly because people like Buffett hire lawyers to find ways to avoid it.

Finally, the rich defenders of the tax fear that if the wealthy can pass all their money to their kids, no one else will be able to get rich. Gates Sr. writes,

Nearly a century ago, reformers such as Theodore Roosevelt worried that the huge fortunes amassed during the Gilded Age would, if left untaxed, evolve into a dangerous, permanent aristocracy.

This is the most ridiculous reason of all. It is so riddled with fallacies that one hardly knows where to start.

Piercing the fallacies of the death tax

The most basic fallacy here is that the amount of wealth is fixed — that if Buffett can give all his money to his children, someone outside his family will be deprived of an opportunity to get rich.

To see how absurd this is, all you have to do is read up on how life changed in the United States between 1800 and 1900, when there was no estate or income tax. Living standards for everyone improved substantially.

Why?

Because new wealth was created at an unprecedented rate. In the following hundred years, material well-being accelerated at an undreamed-of rate. It had nothing to do with taxes. Rather, it had everything to do with freedom and entrepreneurship.

That Warren Buffett and George Soros leave their fortunes to their children in no way impedes a scruffy, ambitious kid in a garage from working his tail off to launch a possibly world-changing enterprise.

In fact, the opposite is the case. Without a death tax, great fortunes remain in the private sector to be invested in new products and services.

The next Bill Gates Jr. has a better chance of getting rich without an estate tax than with it — not because he can inherit all his father’s money but rather because no estates would be diverted to wasteful government spending schemes. (Gates Jr. obviously did not have to inherit his father’s money to become the world’s richest man.) The idea that the government will make better use of those fortunes is demonstrably wrong.

If the heirs fail to use their wealth to serve consumers, they won’t have it for long. As the old saying goes, “From shirtsleeves to shirtsleeves in three generations.” Consumers are relentless judges of how the rich use their money. By their purchasing decisions, they never hesitate to transfer productive assets from ne’er-do-well heirs to people who know that fortunes are built and maintained by making things that improve people’s lives.

By the way, if Buffett et al. think their wealth will harm their children, they have a perfect right to give it to anyone else they wish. What they don’t have a right to do is prevent others from leaving their fortunes to their children.

This should be basic in a free society. Anyone is welcome to try to persuade others to do as he does. But the line must be drawn at the use of physical force. A tax is not persuasion. As George Washington is reputed to have said, “Government is not reason; it is not eloquence. It is force.”

If the economics of the death tax is flawed, the ethics is worse. The question that always gets lost is: Whose money is it? If the creators of wealth aren’t entitled to dispose of it, who is? And if their designated heirs aren’t entitled to own it, one is hard-pressed to understand how the government or “the people” are.

How revealing it is to focus on this issue! Consider what the death-tax advocates are really saying. This is a country that claims to be based on natural rights, including private property and free enterprise. But what does an estate tax imply except that the owner of all wealth ultimately is the government?

After all, in a society truly based on private property, the creators of wealth would have the right give it to whomever they please. An estate tax permits government to assert a claim to wealth that is ostensibly superior to that of its creator.

If the government by default has a claim to whatever portion of estates it chooses, what is that but Bolshevism? If productive people keep their money only by permission, how is that different from socialism or communism? This is not emotional redbaiting. Socialism, communism, and Bolshevism are terms with a specific meaning. Under those systems, government is the ultimate owner of everything. People are permitted to possess only what the system administrators permit. (It changes nothing to say that people vote the administrators into office.)

That is precisely the principle underlying the estate tax. To dispute that a person has the right to decide how his money will be distributed after he dies is to embrace the principle of socialism. There is no logical reason to stop with estates or at 55 percent. The tax on incomes is based on the same principle. At one time the top rate was over 90 percent. No court said that was illegal or unconstitutional. The whim of the legislature is supreme. That, I submit, is socialism. No law or constitution impedes its complete realization.

Gates Sr. writes,

The debate over whether to repeal the estate tax is fundamentally a debate about what sort of America we want to leave to the generations ahead.

He is exactly right. Do we want a free country faithful to the principles of the Declaration of Independence — which affirms that we have natural rights that government may not violate with impunity — or do we want total government subjugating the American people for its own purposes?

If the death tax remains on the books, we will have the answer to that question.

  • Categories
  • This post was written by:

    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.