October 17, 2007


Listen to Adam Smith: inheritance tax is good: Inheritance tax is one levy that makes good economic sense (Irwin Stelzer, 17th October 2007, Spectator)

Which brings us to the final objection to this forgiveness of taxes on inheritance, which in the end is no different from any other income the beneficiary might receive — except that it is not earned by the sweat of his brow or the whirring of his brain. The tax cuts could have been better concentrated on lowering the marginal tax rate faced by all earners. Reduce taxes on the pay for that extra work, and you will get more of it; reduce taxes on the profits from risk-taking, and entrepreneurs will take more chances and create more jobs. Reduce the taxes on recipients of inheritances, on the other hand, and they will work less and be less likely to start up new businesses. Worse still, and perhaps most important, to abandon the laudable goal of trying to make opportunity more equal for all in order to favour the beneficiaries of perhaps the 6 per cent of estates that pay inheritance taxes is a terrible policy trade-off.

At least to an economist, whose policy role should be to tell politicians the cost of their decisions, and then leave it to them to decide whether a policy is worth its cost. Inheritance taxes make good economic sense, but against the economic advantages must be set the limitation they impose on the freedom of people to dispose of their lawfully earned wealth as they see fit.

In my view, that reduction in freedom — the cost of retaining inheritance taxes — is outweighed by the benefits: the economic advantages, especially when compared with other taxes, and their contribution to the drive for greater equality of opportunity. Which makes it too bad that politics trumped economics, since the result is neither greater overall fairness, nor the increased stimulus to economic growth that alternative tax cuts would provide.

Messrs Darling and Osborne would do all of us a favour if they would whip out their undoubtedly dog-eared copies of The Wealth of Nations. To meet the criteria of ‘evident justice and utility’, Adam Smith supported a tax on wealth inherited by children ‘who have got families of their own, and are supported by funds separate and independent of their father’.

Luckily, no thought is required. It suffices that the Right opposes the tax for the Left to seem "conservative" by saying, "us too."

Posted by Orrin Judd at October 17, 2007 3:46 PM

It's a fair point. The problem though is that the UK inheritance tax thresholds have barely moved in 20 years and in the near future, far more families are going to be hit by death duties. It would also help if inheritance tax payments could be spread out over a number of years since there are likely to be legatees selling off assets because they don't have the cash on hand to settle tax bills.

Posted by: Ali Choudhury at October 17, 2007 4:20 PM

This is an extremely misleading appeal to "Wealth of Nations." Specifically, the language Stelzer quotes appears in Book V, Chapter 2, at the beginning of Part II of which Smith sets out four maxims of "evident justice and utility" to govern tax policy. Those four maxims are:

(1) "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities";

(2) "The tax which each individual is bound to pay ought to be certain, and not arbitrary";

(3) "Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it"; and

(4) "Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state."

The US estate tax arguably satisfies (1), or would if the exemption threshold kept some proportion with inflation. It violates (2), (3), and (4).

The business about taxing emancipated children (which is, of course, not a feature of our estate tax -- the law imposes a tax on the value of the estate, more or less regardless of who will inherit, except for the surviving spouse of any age) occurs many pages later and it is not nearly as full-throated an endorsement of the estate tax as Mr. Stelzer would like it. The paragraph in which that language appears reads as follows:

"Of the same kind is the Dutch tax upon successions. Collateral successions are taxed, according to the degree of relation, from five to thirty per cent. upon the whole value of the succession. Testamentary donations, or legacies to collaterals, are subject to the like duties. Those from husband to wife, or from wife to husband, to the fiftieth penny. The Luctuosa Hereditas, the mournful succession of ascendants to descendants, to the twentieth penny only. Direct successions, or those of descendants to ascendants, pay no tax. The death of a father, to such of his children as live in the same house with him, is seldom attended with any increase, and frequently with a considerable diminution of revenue, by the loss of his industry, of his office, or of some life-rent estate of which he may have been in possession. That tax would be cruel and oppressive which aggravated their loss by taking from them any part of his succession. It may, however, sometimes be otherwise with those children who, in the language of the Roman law, are said to be emancipated; in that of the Scotch law, to be forisfamiliated; that is, who have received their portion, have got families of their own, and are supported by funds separate and independent of those of their father. Whatever part of his succession might come to such children would be a real addition to their fortune, and might therefore, perhaps, without more inconveniency than what attends all duties of this kind, be liable to some tax."

Posted by: Random Lawyer at October 17, 2007 5:12 PM

You demonstrate why Smith is an ideal cite:

(1) The dead have no abilities--all ought to be forfeit

(2) It is certain or can easily be made so. X% on wealth over Y amount.

(3) Death is obviously the best point, since you can't take it with you.

(4) The dead have no pockets.

Posted by: oj at October 17, 2007 8:19 PM

The idea that estate taxation somehow produces a virtuous economic result because it redistributes wealth from wealthy people is absurd. I have never seen any studies that corroborate this.

And, once you start down the redistribution road, then the logical trend would be to find other, even more intrusive, ways to take from the rich.

By way of background, what we think of as estate taxes is really called the Federal transfer tax and it has three components -- estate, gift and generation-skipping taxes.

In total, the Feds raise about $23 billion per year from the three taxes, which is approximately 1% of Federal tax revenues. In short, repealing it would have minimal tax impact. And, if the estate tax were repealed, income taxes would go up due to the cessation of the step-up in basis upon death, so it is very possible that we could repeal estate taxes with no loss of revenues.

For every argument that inherited wealth reduces entrepreneurial activity, there are plenty of counter examples--Mitt Romney, Ted Turner and many others come to mind.


Posted by: Kurt Brouwer at October 18, 2007 2:33 AM

It doesn't take from the rich. It takes from the dead.

Posted by: oj at October 18, 2007 6:19 AM

No tax is good policy.

Posted by: sam at October 18, 2007 8:58 AM

Which is inane, but does underlie the anti-inheritance tax argument.

The first time you got mugged and had to catch the criminal yourself you'd be whining about the lack of that which taxes provide.

Posted by: oj at October 18, 2007 11:04 AM

Estate taxes do not take from the dead, but from the living heirs of the person who died. Recently, I had clients whose mother died and they had to pay close to $1 million in taxes to the state and to the Feds. The heirs are not zillionaires and they could really have used that money in their retirement planning.

Insofar as the idea that we won't have police protection absent estate taxes, well that is a bit silly. First, because estate taxes represent less than 1% of the Federal budget and I think we would survive the loss of 1% of Federal policing services. Second, because in their absence, income taxes would probably go up to at least partially cover the lost revenue.

I still have yet to see an honest attempt at an economic argument for estate taxes. It is not so much the issue of taxation that annoys me, but that death should be a taxable event after someone has worked and saved and paid taxes for decades.

Posted by: Kurt Brouwer at October 18, 2007 12:34 PM

Ah, but its much more likely it was the taxes fueling the state's corrosive effects on society that produced the criminal.

let me take you through one of our housing authorities or local schools and I show you what I mean.

Posted by: Perry at October 18, 2007 12:35 PM

We walked past housing authorities to our inner city school. It was reasonably safe.

You lot always underestimate how hard-baked our liberty is and how thoroughly unfree we are.

Posted by: oj at October 18, 2007 2:25 PM

I'm sure they wanted the dead woman's money, which is quite different from it being theirs.

Posted by: oj at October 18, 2007 2:26 PM

I'm sure OJ wants the dead woman's money, which is quite different from it being his.

Posted by: Benny at October 18, 2007 2:53 PM

Yes, it's ours.

Posted by: oj at October 18, 2007 4:09 PM

That's just your should, OJ.

No more necessity or less greed there than in the heirs' position.

Posted by: Benny at October 18, 2007 5:32 PM

Exactly. That's the essence of republican liberty. Once recognize that all of us are greedy and then use universal laws to control that greed.

Posted by: oj at October 18, 2007 6:09 PM