October 11, 2007

CUTTING OFF THE DEAD HAND:

Death and taxes (Lisa Mitchell, 10/10/07, BBC News)

The hottest political potato of the day is inheritance tax, with the Tories and Labour keen to cut death duties. But for 2,000 years, it's been used to redistribute wealth.

Invented by Emperor Augustus to raise funds for soldiers' pensions, inheritance tax has been used by the West to redistribute wealth ever since. It is one of the most ancient and widely adopted state levies on the individual.

The rule of Augustus - or Gaius Julius Caesar Octavianus - as the first leader of the Roman Empire ushered in an era of relative peace and he needed cash to pension off the soldiers back from subduing the natives.

Like its modern day successors, Augustus's tax was revenue raising and hit only those with an estate worth over 100,000 sestertii. Unlike today's system in the UK, it did not apply to those who were next of kin. With varying tweaks, it's a system which has been accepted by societies over the millennia.

But in the past week, controversy over this well-worn formula may have caused a swing to the opposition in 83 marginal seats, prompting the prime minister to cancel his plans for a snap election.

This tax, which affects only 6% of dead people's estates and raises a relatively small amount of total taxation (£3bn), has become a political battleground.


Not only is the historic inheritance tax consist with republicanism--preventing the concentration of wealth/power in certain families--but, since the dead have no rights, it can hardly be argued that said are being violated. Dispose of your wealth during your life.

Posted by Orrin Judd at October 11, 2007 6:54 PM
Comments

Must've missed that bit in Tocqueville where he remarked on the high inheritance taxes in America, their salutary effect on breaking down concentrations of inherited wealth, and how devoted the Americans of the early 19th century were to the ideal of redistribution of wealth.

Disposing of your wealth during your life sounds great, except that's taxable too, at least if you dispose of your wealth to the natural objects of your affection. The thresholds for estate and gift taxes are absurdly low, and the lowness is only going to get more absurd.

Proposition: A tax that causes large swathes of the middle class to require the services of estate-planning lawyers, no matter how great for my firm's profits and my paycheck, is probably bad for America.

Posted by: Random Lawyer at October 11, 2007 7:44 PM

Tocqueville, like all republicans of the day (not to mention Adam Smith), favored high inheritance taxes to break the aristocracy.

www.tompaine.com/Archive/scontent/7082.html

Yes, if you give it directly to people it's basically income for them and should be taxed like other income.

Proposition: tax cheats are bad for America. Just close the loopholes.

Posted by: oj at October 11, 2007 8:43 PM

And if you die suddenly, before you have disposed of the family business, the government should take it. Sounds great, OJ.

Posted by: Palmcroft at October 11, 2007 9:22 PM

Wrong. Tocqueville and Adam Smith both thought laws requiring primogeniture and enforcing entails were pernicious. We abolished those laws in America after the Revolution and Tocqueville saw (and appreciated) the effects half a century later. (Democracy in America, Volume I, Chapter 3). Adam Smith's Lectures on Jurisprudence (the source of the famous quote about the philosophical absurdity of letting the dead dictate what's done with their property) are also adamant about the badness of primogeniture and entails, but they take as a given that people should be allowed to distribute their moveable property as they wish by testament. (See lecture of January 10, 1763; see also Wealth of Nations, Book III, Chapter 2).

Saying people shouldn't be allowed to lock up land permanently is very different from saying the government should confiscate the fruits of a lifetime of labor, whether disposed of before death or by will.

There is no set of loopholes you can close that will stop the rich from avoiding or minimizing taxation of their estates that will not also result in more pain for the middle class than voters in any democracy, especially ours, will tolerate. ("Dad died? Time to sell the family farm / business / tract home in the suburbs, so we can pay the taxes!") Calling my partners' clients "tax cheats" doesn't change that.

Posted by: Random Lawyer at October 11, 2007 9:43 PM

RL wins. As republican as it is to distrust concentrations of wealth, I'm not sure inheritance taxes are the way to deal with it. I distrust politics based on envy, and it's obvious that the rich get around them when they care to, thus the Hiltons and Rockefellers etc. And yet there's little evidence that the Hiltons and Rockefellers etc. exert any disproportionate political power. (That's usually done by the first generation: Hearst, Soros, etc.) And I'll bet the taxes raised are a drop in the bucket compared with broader-based, and fairer, income taxes.

Posted by: PapayaSF at October 11, 2007 10:50 PM

Tocqueville, coming later, saw that the manufacturing class had replaced the landowners as the coming aristocracy and one to be reviled more than the landed. But both recognized the need to distribute the wealth more equitably upon death as well as to get it into the hands of folks who'd do something useful with it.

[Saying people shouldn't be allowed to do something is precisely saying the law should prevent them from doing so.]

The middle class isn't caught up by the tax, only the wealthy are, which is why it's so minimal. Luntz and company have whipped them into a fine froth over the "death tax", but just by rebranding it as a billionaires' tax you can calm them down.

The reason for the tax is republicanism, not revenue.

Posted by: oj at October 12, 2007 12:42 AM

Palm:

No, you should pay your taxes.

Posted by: oj at October 12, 2007 12:43 AM

A straight sales tax avoids all of the issues regarding the rich not paying their share.

If you truly believe that I should redistribute my wealth before I die then I will assume that you also agree that we should abolish an onerous gift tax to make that possible. Should I decide to give my wealth to an individual the government gets 50% of the gift which was already taxed as my income. Seems obcene to me.

Posted by: Scott at October 12, 2007 6:49 AM

Random Lawyer has already made most of the points I was going to make when I clicked "comment." I've just got a couple of things to add:

OJ, do you realize that there's a complimentary gift tax which imposes the same confiscatory rates on transfers of capital should you "dispose of your wealth during your life" as you advise? Does that not affect your argument?

The problem with the estate and gift taxes is that they aren't effective at their stated purpose of destroying dynastic wealth, but they're very effective at suppressing upward mobility. Once you reach the Kennedy-Rockefeller-Hilton-Buffet-Streisand level of wealth, even after writing the check for a 55% marginal-rate tax you still have so much left that your beneficiaries can buy all the toys they want. The people who get hammered are the "millionaires next door"--small business owners and professionals who have enough wealth to be subject to the tax, but not so much that they don't feel it. Almost invariably, these are people who started out middle class or lower. Now, how is it consistent with republican virtue to put a cap on upward mobility?

(Full disclosure: I make my living doing estate planning for small business owners. I'd still support repeal in a heartbeat.)

Posted by: Mike Morley at October 12, 2007 7:38 AM

If the tax doesn't exist to create revenue, it should be abolished. Fewer taxes are a good thing. Using taxation for social engineering is a bad one.

Posted by: Jay at October 12, 2007 9:49 AM

I'll believe it's a billionaire's tax when the exclusion threshold doesn't capture the owner of a middle-class suburban tract home in southern California or New Jersey. House price inflation will get to New Hampshire eventually, too.

I'm all for free alienability of inherited property -- so were Tocqueville and Smith. Tocqueville remarked at length about the abolition of entails and how that reduced the great landowners of New York to the level of their fellow citizens, made their kids get jobs, motivated the new owners of the land to improve it, etc. Funny how leaving your kids stuff they can spend or sell will have the effect of pushing capital toward higher-return uses, but leaving them stuff that's locked up in a legally enforceable trust for their great-grandchildren won't.

Preventing concentrations of inherited wealth may be a republican principle, but confiscation and redistribution of that wealth by the state isn't. If you want to prevent Paris Hilton from spending daddy's money frivolously (although that's redistribution of wealth, too), then be straightforward about it and bring back the whipping post.

Posted by: Random Lawyer at October 12, 2007 10:07 AM

That's the point of the republic.

Posted by: oj at October 12, 2007 12:40 PM
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