Want Socioeconomic Mobility? Repeal Estate Taxes

In a climate of increasing fear over inequality and the concentration of wealth, Karl T. Muth explains his views on social mobility and taxation in the USA.

The U.S. House of Representatives voted on April 16, 2015 (not coincidentally, the day after tax day when public sentiment is least sympathetic toward the Internal Revenue Service) to repeal the estate tax and to let people engage in the estate planning, philanthropy, and legacy-building that is currently encumbered by the tax. The least surprising aspect of this story was the nearly-immediate criticism of repealing the estate tax, much of it from left-leaning media outlets.

Let’s begin with something obvious to economists and non-economists alike: Estate taxes are a type of double-taxation. In other words, like capital gains taxes, they are a tax on money that was already taxed at least once (in America, often twice, at the federal and state levels) at the time it was earned. The “inequality police” in the media are quick to be in favour of estate taxes (and higher income taxes) as a way to capture, for the public purse, proceeds from the American economy's most productive activities and personnel.

I have advocated for, and continue to advocate for, a zero-estate-tax and zero-capital-gains-tax American tax policy. Not only do these taxes allow the tax man to take a second bite at the proverbial apple (potentially under radically different policy and fiscal conditions from when the money was earned), but they needlessly interrupt (and inconvenience and add expense to) the already-difficult task of accumulating and transmitting wealth intergenerationally.

The American narrative often dwells on the self-made man as a caricature of the hard-working, Protestant, “rags to riches” story. This concept of the modernized novus homo is often highlighted as righteous or praise-worthy. Yet most fortunes are built gradually, with intergenerational wealth transfer being a key component. Whether the person inherits an operating enterprise, a farm ripe for suburban development, or a portfolio of stocks and bonds, these are all examples of inherited wealth that should be celebrated, not criticized.

By discouraging intergenerational wealth transfer (and thereby encouraging elaborate estate planning by lawyers and larger inter vivos gifts by testators), those who advocate estate taxation frustrate the very means by which American social mobility has taken place. People are disproportionately (and unreasonably) concerned about the 100 or 1,000 wealthiest families in the United States being able to continue their legacies of wealth, but this disregards the tens of thousands of families who need to pass twenty to fifty million dollars to the next generation to begin building wealth at a level where investment returns – rather than earned income – will be the relevant metric for the next generations’ performance.

If estate taxation continues in the United States, it will continue to substantially retard – rather than enhance – social mobility. This policy framework of taxation between generations ignores that the American dream is one that takes place over many generations and that family wealth is often built in units of decades and centuries, rather than within the arbitrary and unpredictable compartmentalisation of lifetimes. The current taxation policy has precisely the opposite effect from its intended one: It prevents new families from ascending to a place of financial security, rather than forcing those families already at the top to descend. Worse, it embraces the concept of wealth as a relative scorekeeping system in society rather than recognizing capital as our most important tool to fund new enterprises, encourage innovation, support great institutions, attract the brightest immigrants, and ensure the proper functioning of the legal and political systems.

I hope the repeal of all estate taxation is a recurring theme, passed year after year in future congresses and that, at some point in the near future, Mr. Obama's replacement in the White House gives this proposal the consideration it deserves.