There is no such thing as a good tax, but I think the Death Tax is the least bad tax.
Taxes are a necessary evil. They are evil because they take money away from the person who earned it, but they are necessary because we want government to perform certain services, and government needs money to pay for those services. (The Libertarian Party suggests that the government should charge user-fees as much as practical, but it usually isn’t practical.)
The Death Tax (also know as the Estate Tax) is the least bad tax because (1) it raises a significant amount of money, (2) in a relatively painless manner, and (3) from those who can most easily afford to pay it.
- A lot of money. The Death Tax applies only to huge estates (those in excess of $3.5 million in 2009), but its rate of taxation is quite high (45%), and thus it raises a considerable amount of money for government. According to FairEconomy.org, the Death Tax raised $20 billion in 2003.
- Relatively painless. I say that the tax is relatively painless because it is triggered when the previous owner of the assets has died, so there is no pain there, and the new owner of the assets is receiving a windfall, so there is no pain there. This process reminds me of the old story about how lawyers perfected the art of helping transfer money from one party to another, all while slicing for themselves a significant portion of the pie during the transfer. Neither party really misses it. That is what the government is doing with the Death Tax; i.e., borrowing a trick of the trade from lawyers.
- Ability to pay. And finally, the Death Tax is assessed against those who are most able to pay it (large estates). Although there has been a lot of talk about a flat tax, most of that talk is a product of the anger people feel toward a complicated tax code that allows some high earners to avoid paying taxes. I believe that most people who think clearly about this subject believe that rich people should pay tax at a higher rate than poorer people. That is called a progressive tax.
Another plus with the Death Tax is that it levels the playing field in America by taking money away from heirs who already have a huge economic advantage over other Americans. This Death-Tax money can be used to pay for necessary government services without taxing non-heirs, so they will have a better chance to succeed.
Mitt Romney has suggested that, if you want to raise taxes to discourage certain behavior (like carbon belching or gas guzzling), then you should reduce taxes elsewhere to ensure that you don’t grow government. I suggest that the same principle works in reverse here – i.e., if you want to eliminate the estate tax, you should be required to increase taxes elsewhere. Otherwise, you will exacerbate our deficit.
Let me know when you find a better way to raise $20 billion.
October 22, 2010 – addendum
While reading The Change by Arthur Brooks, I encountered an interesting quotation by Thomas Jefferson:
- To take from one, because it is thought his own industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers, have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, the guarantee to everyone the free exercise of his industry and the fruits acquired by it.”
I tend to give a lot of deference to anything uttered by Jefferson. I also am sympathetic to a friend from McVille, ND who frequently mentions the word “confiscatory” in connection with the estate tax. Perhaps there is an acceptable middle ground – e.g., limit the tax to million-dollar estates, make the rate progressively higher toward the billion-dollar estates, and never have a rate that exceeds 50%.