Friday, April 22, 2011

Inheritance taxes

Concerning the issue of fairness, discussed in the last blog, there is the matter of inherited wealth and the control of our country and its economy. Not only does the top 1% of income earners collect 24% of income, as remarked above, but it also controls about 42% of all wealth (stocks, bonds, businesses, property etc.). Here’s a chart from MyBudget360:

If this wealth is passed down via inheritance, the result is a few very wealthy families with not only immense economic power from their huge financial holdings, but with the vast political power that such wealth can purchase through lobbying and political donations.

The Founding Fathers (Madison, Jefferson, Adams etc.) saw these effects of concentrated inherited wealth in Europe and were fearful of them. In a letter to Madison, Jefferson wrote: “Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise.”

The distaste for vast inherited wealth was, throughout American history, not confined to any political party.

Teddy Roosevelt said that federal taxes should “put a constantly increasing burden on the inheritance of those swollen fortunes, which it is certainly of no benefit to the country to perpetuate.”

Herbert Hoover, a conservative Republican, described the inheritance tax as "one of the most economically and socially desirable—or even necessary of all taxes" to curtail the "evils of inherited economic power."

There is an unbroken line of belief, from colonial times to the present, in progressive income taxes and inheritance taxes. They are as American as apple pie.


  1. The founding fathers were also fans of having slaves and restricting voting privileges to white males. So please stop with bogus arguments like that.

    Why should my estate be taxed after it's already been taxed once when I earned the money and then again when I invested my after-tax wages? If I promise not to do any lobbying will the government just leave me alone rather than impose a death-tax?

  2. 1. Actually, the "founding fathers" were not necessarily "fans of having slaves" though some had slaves. There were issues of getting all the colonies "on board" for the constitution. In any case, many people are interested in what the people who created this country had to say about all sorts of things, with taxes being pretty high on the list. I wasn't saying that this was the only argument -- I gave several others -- but it is interesting, especially to many Republicans who seem to think they are somehow taking a strict or historical position on some issues. This is not a "bogus" argument. What do you have to say about TR's and Hoover's comments? We probably don't agree with everything they ever said, but it's interesting to hear their opinion since neither was a left-leaning Marxist Leninist (at least I don't think so).

    2. Why should you be taxed twice? Why not? Who said that there is something wrong with taxing you twice on some items. You get taxed once on your income and again with sales taxes, gasoline taxes, excise taxes etc. etc. Many people think that the accumulation of disproportionate wealth and power justifies such a tax on inherited (unearned) wealth. You may not like it, but "why should" doesn't seem to require any further answer. You should because a majority of voters in this democracy elected representatives that decided, for many reasons (some enunciated, at greater length than I quoted, by the founding fathers and many others) to enact such taxes. Why shouldn't you be taxed, after all?

    3. Grown-ups are not as impressed as you may think by calling the inheritance tax the "death tax." Yes, of course it's a death tax in the sense that it is imposed on the estate of a dead person. What's so bad about that? If you think of it as taxing the unearned income heirs, than you could call it the "fell into unearned wealth" tax. So? If it's used to help fix up the country, pay for various wars and for the health and well-being of the citizenry, what's bad about that?

    How's about some serious comments instead of superficial sniping?

  3. Anonymous - the double taxation argument is a bit overstated because much of the value of an estate is on previously unrealized gains that have never been taxes. For estates worth over $10 million, 56% of the value, on average, is previously unrealized gains.

    I would also add two more reasons in favor of the estate tax.

    * Fairness: The people who pay the estate tax are paying it on money that they did nothing to earn. If I had a rich relative who died and left me a $5 million estate, I would be extremely upset about their death, but I would not be upset that I received only $4.3 million after the estate tax, rather than $5 million. Taxes for core government services have to come from somewhere, and the estate tax is probably the fairest place for them to come from.

    * Restoring Meritocracy: The estate tax is the most progressive and meritocratic tax in the country, as it impacts only the richest 0.3 % of estates and helps prevent the perpetuation of wealth in wealthy families from generation to generation. Contrary to Republican myth, only approximately 80 small businesses and farm estates nationwide owed any estate taxes under the 2009 standards. With the income gap between the richest 1% and middle class Americans tripling between 1979 and 2007, it is critical that we restore the estate tax in order to help reduce that gap.

  4. Hardly sniping at all. When my dad died the government took almost half his estate. Was that fair? He had worked his butt off for 40 years and never made more than $100,000 a year. Is it fair that his kids see so much of that go to the government?

    The estate tax has long needed an overhaul, like the AMT, to better index it and only hit the super rich like the Gates and Buffers of the world.

    It should not be relied on for basic government services. Everyone should have to contribute to the federal take so we all feel responsibility for what the government does with our taxes.

    And restoring the estate tax as you say will not, I'm afraid, restore any income inequality. We need those at the bottom to get better higher paying jobs. You don't accomplish that thru taxing the rich.

    And double taxation is not overstated at all. The money I got from my dad was taxed when he earned it, plus again as he invested and saved it, and then again when he died.

  5. Anonymous: Hmm. I don't think that the claim that "the government took almost half his estate" can be quite correct. I don't know when Anonymous' dad died, but the estate tax, as I recall, used to exempt the first $1 million (in 2002); that number was raised to $2 million and continued to be raised; it is now $5 million; so it did, in fact, have an "overhaul." Furthermore, the top rate has decreased from its high of 55% in 2001 to 35% now. I'd be surprised if someone who "never made more than $100,000 a year" could have had an estate that was subject to a 50% inheritance taxkj, unless you are counting state taxes as well. Maybe there were back taxes, or IRAs for which no tax had been collected.

    That still leaves a lot of unearned wealth that can be inherited. I can understand that one would like to do whatever one can with the money that one has earned, but there are also good reasons to have estate taxes. It's not a high priority one way or the other for me, but the arguments that have been historically been made for it are compelling.

    What is accomplished by taxing the rich is fairly distributing the tax burden. Yes, we need to correct income equality as well.

    Also, as I said before, why can't income be taxed more than once? You may not like it, but it's neither illegal, immoral nor fattening, and is done in many forms by many levels of government.

    Finally, how was your dad's income taxed again when he invested it and saved it? Only the gains from his investments, and dividends from his savings, was taxed again, not the principal.

  6. No, when he died the exemption was less than $1 million and the rate was very close to 50%. His IRA had already been taxed but his taxable accounts and house and small business all add up quickly. And yes the principal isn't taxed again. My point was that it was taxed again when he received income and capital gains on money already taxed once.

    You say that it "fairly distributes" the tax burden. What proof do you have of this? How do you know that the poor benefit from it? Why not just do away with it and raise taxes on everybody across the board - have everybody pay the same federal rate on their income and blow up most deductions. Wouldn't that be the "fair" thing to do?

    You say it is not illegal, which I cannot debate. But not immoral? That's ridiculous. The estate tax punishes those who saves and avoids those who just spend everything that they make. Is that moral?

  7. As for Roosevelt, what type of tax rates do you suppose he had in mind when he made the comments you cite? At the time of his comments, income taxes took 1% of incomes over $3,000 per year. If you made half a million, you got hit with a 6% income tax rate on the amount over half a million. And the estate tax claimed a whopping 1% for a $50,000+ estate and 10% for a $5mm estate. By today's standards, those people got off very easily. If Roosevelt wanted to even double those rates I'd be fine with that. I'm not sure how he'd react to today's much higher rates.

  8. Hi,

    I'm posting from New Zealand.

    I believe 100% inheritance taxes are a necessity.

    One of the biggest challenges for this century will be income and wealth inequality. The graph you have shown is quite ominous and there has to be a better way. Wealth should be distributed in relation to one's talent, skill and experience.

    There are some very wealthy people that are self made, and they should be applauded and celebrated. But quite the opposite for the benefactors of an inheritance.

    Inherited wealth gives the recipients a huge advantage over others with no inheritance. Similar to being in the Olympics 100m sprints, and if your Dad is a millionaire you can start the race 10 metres from the finish line. It's not right.

    As many developed countries move through the generations, I believe inheriting vast amounts of wealth will be seen as unjust, because not everyone is starting from the same starting line. And the concentration of wealth amongst a few will become more prominent.

    An inheritance tax of 100% would be offset with very low income taxes.

    From NZ