Do We Need an Estate Tax?
Opponents of the estate tax (or “death tax”) point to it as being unfair to the individual, especially the very wealthy one, claiming that the state has no right to “double tax” an estate (once upon claiming income, once upon death). However, many wealth sources are “double taxed,” so this alone does not win an argument.
The estate tax may be unfair to a very limited set of individuals with over $5.45 million in wealth that they want to pass down to their heirs, adjusted for inflation. However, it is fair to the people as a whole and the nation. Carnegie says this in his 1889’s Gospel of Wealth, in which he attempted to codify the responsibilities of the new rich.
TIP: This article is contingent on a general definition of fair that sees fair that sees fair as a utilitarian concept (“the fairest for all”). Feel free to provide counter-arguments in the comments.
FACT: The Estate Tax Provides Less than One Percent of Federal Revenue…. most of the nation’s income comes via federal income taxes, payroll taxes, corporate taxes, and excise taxes. Thus, while we argue an estate tax is vital and fair, it is only 1/100th of the the current picture because of deregulation. This page is about whether an estate tax is just, not about the current mechanics of our estate tax.
2015 Estate Tax and Annual Exclusion Tax.
The Estate Tax and Hoarding, the Velocity of Money, and Inflation/Deflation
Cutting some taxes on those who will spend and invest their money can have a range of positive effects on an economy and steady inflation. Cutting taxation on the excess wealth of the super rich which they are not investing, or using to build businesses, or even using to buy luxury items does not have the same effect. Instead, it can cause unwanted deflation or inflation depending on other specifics like fiscal or monetary policy.
This can be explained by the quantity of money theory equation: MV = PQ. The total money supply is M. V is the velocity of money or the number of times a single dollar is spent in a day. The combination represents how much money is in use in the economy each day. They both relate directly to the General Price level (P) and Quantity of goods and services produced (Q). In this equation, when people “hoard money” by “not paying an estate tax and other taxes” they “increase the money supply and decrease the velocity of money.” Thus, “Congress has to borrow money to avoid rapid deflation or inflation.” This leaves the FED only with the ability to “increase or decrease rates,” and they are already at “near zero.”
When the rich hoard money, everyone else suffers. Few things are more insufferable than going into debt because of a successful parent’s offspring. Going into debt for the parent is offset by their participation in the growing economy; and is thus “fair” in a sense. We are a nation which detests hereditary Kings, but we often ignore the vices of hereditary Barons.
Consider this example. A town has $100 to its name, 10 citizens, each of whom owns a shop with a fixed daily inventory of goods, and each of whom has $10. Every day each shop owner spends $10 by spending $1 in another shop. At the end of the day, each shop has $10. An economy runs on the base money supply plus the velocity of money such as this is predictable. Imagine that once a day a tourist comes in and brings $1, spending it at a random shop so that shop ends their day $1 up and spends that $1 the next day. The economy grows steadily, and the fixed amount of goods steadily increase in value. Since there will never be more goods, only their value can go up, not their quantity. Now imagine one shopkeeper manages to attract that new tourist’s business every day and starts saving the extra $1 for their heir. Now, instead of steady inflation, we have stagflation. There is no $1 a day growth of the economy although there is a $1 a day growth in money supply. Shopkeeper X is trying to save for their heir, but they are dragging down growth in the current economy by “hoarding” money that could have been circulating. Now imagine that shopkeeper saves so much that the town dips under its base $100 and has to start borrowing to offset the hoarding. The town now has debt which it must pay interest on, and inflation has set in. The money supply got larger, but the “velocity of money” circulating in the economy hasn’t increased due to that one shopkeeper saving the excess dollar whenever it gets to him. Continue this process, and over time it starts to get ridiculous. The whole town lands in debt. The cash that was hoarded far exceeds any cash-on-hand of the town. When the shopkeeper dies, the heir inherits all the money at once. That heir has the money needed to buy all of the town’s debt, collect interest, and have the capital to make future loans. Of course, nothing says the heir has to sell their shop business or not start the cycle again with their heir.
Yes, that is a simple example that doesn’t account for a range of paradoxical effects (see an essay on the velocity of money), but the gist is true. Hoarding money that needs to be in the economy to give a fortune to someone who isn’t contributing the economy is only good for the benefactor. It hurts everyone else, and the problem compounds over time. It is “unfair.” A fairer scenario would have been one where a part of the money was taxed and less money was saved. If people know they will be taxed more, they will save less. So in both cases, an estate tax would have provided useful incentives.
What is Velocity of Money? This video tells a different version of the story above, this time for “large corporate retailers hurt local economies.” Anything that “takes money out” of an economy has the same general effect.
The Estate Tax Like Other Taxes are Necessary Fiscal Policy
Over time economic slippery slopes, of which the estate tax related pitfall is just one of many, can lead to the political and economic inequality which has historically led to the rise and fall of nations.
We cannot maintain a system that does not tax out wealth back out and just borrows and creates debt. Thus, a “fair estate tax” is not only ultimately fair in general, but necessary.
The goal isn’t to punish those who do well; the goal is to avoid our nation’s wealth being tied up in some trust fund while the people suffer the effects of inflation and economic and political inequality over time.
A nation that values liberty and democracy must by extension have wise fiscal and monetary policy aimed at controlling the money supply and wealth gap over the short and long term. Thus, there is no other option aside from an estate tax.
Given the above, any given nation must construct a fair estate tax that incentives real economic security for all and allows for philanthropy. This isn’t about punishing the rich; it is about ensuring economic prosperity for future generations and Econ 101 in terms of fiscal policy. As for U.S. policy, we must not allow a further dismantling of the estate tax and should seek to make it truly more fair for all (taking into consideration the economy, debt, and other taxes).
Monetary and Fiscal Policy: Crash Course Government and Politics #48. Congress enacts a fiscal policy (what gets taxed and spent). The FED enacts the monetary policy (interest rates and such). Together they affect the money supply and work toward ensuring the short and long term health of the economy.
TIP: See a similar argument for flat tax vs. a progressive tax.
FACT: Today, 99.8 percent of estates owe no estate tax at all, according to the Joint Committee on Taxation. Only the estates of the wealthiest 0.2 percent of Americans — roughly 2 out of every 1,000 people who die — owe any estate tax. This is because of the tax’s high exemption amount, which has jumped from $650,000 per person in 2001 to $5.45 million per person in 2016. Only 2 out of ever 1,000 estates will ever owe the tax on dollars over the exemption amount. SEE: Ten Facts You Should Know About the Federal Estate Tax.
TIP: One can put money in a philanthropic organization or company and then transfer control to dependents. This is one way to transfer wealth without it being subject to an estate tax. The ideal estate tax seeks to give an opportunity to the richest and their families to invest in the economy to continue their wealth but aims to avoid financial hoarding by the descendants of those who once contributed to the economy as that isn’t very “fair” to the 99.99%.
The Big Picture: Raise the Estate Tax.
The laws of accumulation will be left free; the laws of distribution free. Individualism will continue, but the millionaire will be but a trustee for the poor; entrusted for a season with a great part of the increased wealth of the community, but administering it for the community far better than it could or would have done for itself.
Of such as these, the public verdict will then be: “The man who dies thus rich dies disgraced.”
[Self-directed Philanthropy], in my opinion, is the true Gospel concerning Wealth, obedience to which is destined some day to solve the problem of the Rich and the Poor, and to bring ‘ Peace on earth, among men Good-Will.”
– From an essay by Andrew Carnegie on individualism and the need for a progressive estate tax.
Whenever a tax is imposed, each taxpayer becomes responsible for the redemption of a small part of the debt which the government has contracted by its issues of money, whether coins, certificates, notes, drafts on the treasury, or by whatever name this money is called. He has to acquire his portion of the debt from some holder of a coin or certificate or other form of government money, and present it to the Treasury in liquidation of his legal debt. He has to redeem or cancel that portion of the debt…The redemption of government debt by taxation is the basic law of coinage and of any issue of government ‘money’ in whatever form.— Alfred Mitchell-Innes, The Credit Theory of Money, The Banking Law Journal