Wednesday, May 24, 2006

Death & Taxes... Or Both

There is an old famous line that there are only two guarantees in life: Death and taxes. Then, of course, there is the combination of all that is cruel: The estate tax.

Another blog, DovBear, recently had a series of posts regarding the estate tax. The best arguments were not from the posts, however, but rather from the comments section, in a debate between Michael [who is pro the estate tax] and Moshe Potemkin and myself [who are against it, or at least feel it should be limited].

Near the (current) end, Michael made an interesting comment: [edited and split for clarity]
As I explained, the right way for government to tax people is to figure out how much the government needs to spend, and divide that amount by the amount that each individual benefits from that expenditure, and tax each individual accordingly.

This can be done in any number of ways. Consumption tax, wealth tax, income tax, etc. In our society, we have a mixed system.
To this I responded:
I'm most in favor of a consumption tax, which is the closest to actual measurable gain that a person gets.
This would be an interesting aside, particularly for accountants and economists, but the main points in this discussion are on a different tack and were still to come. Michael also argued...
So, the only relevant arguments with regard to taxes are ones that relate to the question of

a) Is the citizen being taxed more than the benefits he gets from government? and
b) (if a is true) Is it moral for the majority to decide to take this citizen's money for the expenditure on which it is being spent? and
c) Is the tax going to have a negative impact on revenue by creating disincentives to wealth building from which the tax is drawn?
I thought these were interesting points, and I responded:
a) Impossible to tell. Always. And it's even harder to weigh individual gains of one person against the other: For some, welfare/WIC/whatever is literally keeping them alive. Should they then pay more taxes? Therefore, this factor cannot be used.

b) Even if you disagree with my conclusion on (a), I don't think so, though obviously DovBear does. There's an old joke: If a man would point a gun at someone in a parking lot and take all their money, that's called a mugging. If he first explains to the other people in the parking lot how he's going to divide it up among the rest of them, that's called democracy in action.

c) Irrelevant, once the first two reasons are not applicable. Though in response, the disincentives do exist, even if at a lesser scale than (say) raising income taxes.
Obviously, we need a fair tax system in this country in order for it to run properly. But is an estate tax a fair [or necessary] tax? Many people pointed out the obvious "double taxation" that exists on [most] portions of an estate, though Michael argued that the concept of double taxation is meaningless. It is fair to say that most people disagree with Michael on that, though he did bring an intriguing argument.

Michael did make a strong argument against another idea many were pushing: That an estate tax creates a disincentive to work. In fairness, the disincentive is far less than (say) typical income taxes, and Michael acknowledged that in those cases there is a clear disincentive to work when taxes are high. But the economic gains from the estate tax, he argued, are greater than that which is lost because of the disincentives from an estate tax. This is debateable and not truly measureable, as it is hard to determine whether some businesses are adversely affected by early retirement and similar occurences.

But one aspect which is very important that was not taken into consideration is how the taxes must be paid. Estates are not made up of pure liquidable money. They are made up of businesses, stocks, investments, real estate, and the like. In order to pay a 40-50% tax on an estate, the heirs may be required to sell off major portions of a business. This would likely result in a terrible economic effect, as the stability of both large and small companies which have majority owners would be shaken. Investors would be less willing to invest in companies with older CEO's, afraid that a death may result in the company having to sell itself, and companies would not be able to produce nearly as much. Workers would be laid off as some companies would simply decide to shut down portions of its operations in order to pay the taxes.

It will not be the tax itself that has an adverse effect on the economy, it will be the payment of those taxes. A large estate tax is certainly not wise, in addition to the arguments above that it simply is not a fair tax. Even if one disagrees and feels it is a fair tax, the tax should be as minimal as possible so as to ensure businesses do not suffer from a lack of stability. Otherwise, the tax hurts far more than it helps.

EDIT: Reading this post again an hour later, I realize that this was not the most clearly written post. I apologize, but I'm going to leave it as is. If you are having trouble understanding any of the points I was trying to make, please note as much in the comments. Thanks.

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