How Capitalism Will Save Us (35 page)
Read How Capitalism Will Save Us Online
Authors: Steve Forbes
Q
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REN’T “DEATH TAXES”—AKA, INHERITANCE TAXES—NECESSARY TO PREVENT ARISTOCRACIES?
AN
O. DEATH TAXES HAVE ACTUALLY HELPED PRESERVE THE FORTUNES OF THE WEALTHIEST PEOPLE, WHILE PREVENTING THOSE ON THE WAY UP FROM BUILDING WEALTH AND PROTECTING THEIR FAMILIES
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riginally, the Bush administration wanted to abolish the death tax.
But Congress insisted—erroneously—that it would cost too much. To get his tax cuts passed, the president struck what was supposed to be a compromise: the inheritance tax would disappear for one year in 2010. Then it would return at the higher—and onerous—rate of 55 percent. The Bush administration went along with this in the hope that the single year of tax relief would fuel public demand for the permanent abolition of the death tax. They were wrong.
Instead, the need to pay for today’s soaring spending has created pressure to keep the tax. President Obama has proposed keeping the top rate at 45 percent in 2010 and thereafter. If nothing is done, then in 2011 the top rate would increase to 55 percent. The levy would also kick in sooner: today’s $3 million exemption will decline to $1 million.
Actually, death taxes—or inheritance taxes—raise a minuscule amount of money for government coffers—about 1 to 2 percent of tax receipts for the federal government, if that, according to the Tax Foundation. Then why bother with them? The argument is supposed to be “fairness.” The first death taxes were devised in 1916 to raise money to beef up the military as World War I loomed. The tax was supposed to prevent the kind of entrenched aristocracies that dominated Europe by preventing estates from being passed to “unworthy” heirs.
In fact, the death tax has helped to
perpetuate
such fortunes by forcing the wealthy to hire high-powered lawyers and accountants to preserve their money via tax-avoiding trusts. If they were not compelled to resort to such protective devices, large estates would be subject to the normal forces of creative destruction and dissipate more rapidly. Those unworthy heirs would have a far easier time frittering away their inheritances.
Many of the people affected by the tax are far from wealthy. Studies show heirs to be often less affluent than the relatives who leave them their property. Thus, the tax is “much less progressive than its supporters believe it to be.”
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The Tax Foundation has found that, in many ways, a high death tax functions much like excessive income taxation. It discourages entrepreneurship and wealth creation:
The estate tax’s 55 percent rate …had roughly the same disincentive effect as doubling an entrepreneur’s top effective marginal income tax rate. … At some point the threat of estate taxation causes entrepreneurs to become more likely to retire early rather than continue to work. If the estate tax encourages entrepreneurs to stop working and saving, not only does this reduce federal income and payroll tax revenue, but also results in less overall wealth creation in the U.S. economy.
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Fewer jobs and opportunities end up being created for the broader economy by entrepreneurs who end up selling their businesses and retiring sooner than they otherwise would have.
A typical example: fear of the death tax forced the Mavar family of Biloxi, Mississippi, to sell its sixty-two-year-old Mavar Shrimp & Oyster Co., Inc. to H. J. Heinz in the late 1980s. Selling the business at that time allowed the family to pay a lower capital gains levy—avoiding a 55 percent death tax that would have required selling assets and breaking up the company.
The Mavar family had hoped their buyer would have continued to operate the business in Biloxi. But Heinz soon moved the company’s operations—and its jobs—out of the state. Family member and former company vice president Victor Mavar recalled in written congressional testimony:
Obviously, most of our employees, who had lived in Biloxi for all of their lives, were not able to simply relocate with the new owners. While a handful did move, the majority simply lost their jobs and had to start new careers. Today, I regularly meet folks on the streets of Biloxi, who tell me that they used to work in our business, and state that they wished it had never been sold….
I’ve avoided making any investments in other new businesses, which may not turn a profit for several years. I have chosen to do this despite my interest in supporting the rebuilding of Biloxi, which was ravaged by Hurricane Katrina in 2005.
In fact, I have received requests for investments in several local businesses, including a housing development that would help lower and middle income families who lost their housing due to the hurricane. However, I have been forced to turn them all down, lest I burden my children with the same death tax that we sold the business to avoid. As I see it, the death tax has encouraged a “wealth-redistribution,” not from the rich to the poor, but from the local community to the national corporations.
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Mavar also complained about the overwhelming costs of death-tax compliance:
Even with the sale of our business, I am still concerned about being able to pay for the death tax. I’ve spent a fortune on attorneys, accountants, life-insurance and tax avoidance measures, such as early gifting to my children and charitable endeavors.
One 1992 study by economists Henry J. Aaron and Alicia H. Munnell estimated
the cost of complying with estate taxes to be one dollar for every dollar of revenue raised—nearly five times more costly per dollar of revenue than the notoriously complex federal income tax
. According to the authors of the study, “the ratio of excess burden to revenue of wealth transfer taxes is among the highest of all taxes.”
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In the end, the death tax costs society far more than the trivial revenues it raises. It undermines the very “fairness” its designers were trying to achieve, as entrepreneur and radio commentator Herman Cain can attest to. His late father, Luther Cain, was a grandson of slaves, had no college education, and worked jobs as a barber, janitor, and chauffeur. In the beginning, Luther Cain was the kind of low-income person advocates of tax “fairness” profess to care about—except that he did too well, building a nest egg of slightly under $1 million by the end of his life in 1982. Hermain Cain wrote to Congress,
By the time of my mother’s death in 2005, my father’s assets had grown modestly leaving his family with a death tax liability of $1.3 million. My father would have been proud to have known that his hard earnings had been well-managed and used to propel his family to ever greater heights. Somehow, I do not think
he would be nearly as pleased to learn that nearly half of it never made it into the hands of his grandchildren.
As his son acknowledges, Luther Cain is a powerful example of how excessive taxes destroy economic growth and hurt the very people they’re supposed to help.
My father is only one example of thousands. Most Americans who have earned over a million dollars in their lifetime have done it through hard work and rigorous discipline. It is easy for members of Congress to talk about wealth disparity and to gloat about their grand schemes to ensure “fairness.” It is another matter when they confront the individuals whose “wealth disparity” they are actually seizing.
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REAL WORLD LESSON
Death taxes have the unintended consequence of forcing the very wealthy to protect their fortunes, while keeping individuals of moderate means from building wealth
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QW
HY NOT JUST COLLECT MORE MONEY FROM “SIN” TAXES ON CIGARETTES AND ALCOHOL?
AS
IN TAXES AND OTHER ATTEMPTS AT “SOCIAL ENGINEERING” THROUGH TAXATION USUALLY FAIL
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f taxes on income are bad for the economy because they discourage constructive, wealth-creating transactions, what’s wrong with financing government by taxing behavior most people agree is destructive—like smoking, for example? After all, supporters argue, so-called sin taxes deliver a two-for-one benefit: they generate needed revenue for government while discouraging undesirable activity.
