As David Logan of the Tax Foundation noted in a recent public testimony, proponents of a tax on one’s estate at death mistakenly emphasize three outcomes.
The break up of large concentrations of wealth
Given that wealthy people are likely to bequeath to multiple people anyway, this is, to a large degree, a non-issue. The wealth is already broken up. Regardless, wealthy people can bequeath prior to death (inter vivos), and attempts to tax them beyond what they can avoid will discourage greater wealth generation, a “virtue tax.”
In terms of inequality, who said the money was going to other wealthy people? It may not, and two prominent studies have shown that inherited wealth has almost zero impact on such inequality.
“When wealthy investors were polled, only 7 percent indicated that inheritance was a source of any of their wealth, and it is estimated that 85 percent of millionaires in this country are the product of self-made success.”
Increased revenue for state services
Given that the death tax only brings in 0.3 percent of North Carolina’s general fund revenue, this would appear foolish at face value. However, there are good reasons why a death tax, even if imposed at a higher rate, would fail to generate revenue for a state.
The complications associated with collecting taxes on a deceased person make the compliance costs prohibitively high, and an industry has developed around avoiding it anyway. (That may include changing residence to a state without a death tax, such as Florida.) Those with wealth on hand are the best equipped to utilize this industry, and the resources wasted on this process divert time and energy away from productive investment and income generation. One estimate cited by the Tax Foundation, for example, puts the compliance costs of the federal death tax as roughly equal to the revenue it generates.
Increased tax-deductible charitable giving
This confuses what charitable giving is. Apparently, giving is only charitable when the wealth goes to a government-approved, non-profit organization, and coercion from the government doesn’t counter the charitable element. We’re smarter than that and realize that the bequeathing of money in the absence of such coercion is more charitable, not less.
But even according to the flawed understanding, this argument fails.
“In 2003, experts predicted a drop in charitable contributions of between 22 percent and 37 percent if the federal estate tax were repealed, but IRS data since then contradict these forecasts. After 2003, even as the federal exemption continued to climb during the phase-out of the federal estate tax, charitable contributions remained steady for charitable organizations and increased for private foundations, even when adjusted for inflation.”
A few bones to pick
Logan concludes by saying that the goals of wealth transfer taxes were well intended. It’s just that they have not been achieved (and presumably will not be). Since when is redistribution, forcibly taking from one and giving to another, well intended? The same goes for charitable giving. Coerced giving is not charity, and we don’t need governmental officials to decide what is and what is not charitable in nature. In terms of federal activities in these areas, I must have missed both in Article I Section 8 of the U.S. Constitution.
