The Economist: The case for taxing death

Death tax

This author has a love-hate relationship with The Economist. I love to hate it.

My dissatisfaction with it rests primarily on its hiding behind the moniker of being a conservative, free market magazine while advocating for the worst statist positions possible. With a straight face, and far too many words, they persistently push for central banking, neocon foreign policies, and policies designed to “confront” global warming.

The latest example of its chicanery is its latest cover story, which makes a case for the estate tax.

The magazine claims that the estate tax pits “two vital liberal principles against each other.”

One is that governments should leave people to dispose of their wealth as they see fit. The other is that a permanent, hereditary elite makes a society unhealthy and unfair. How to choose between them?

The Economist creates a false sense of tension through its selection of these principles. The second one presumes that a permanent elite can arise in a society without the help of the state. However, the only way a permanent ruling class can arise is through the state.

To paraphrase Murray Rothbard and Franz Oppenheimer, there are two ways of acquiring wealth: by selling products and services through the free market, or by stealing other people’s stuff. A free market won’t allow a permanent elite to exist, unless that elite constantly provides value through providing goods and services to people across generations. That is highly unlikely.

However, the state is essentially a framework through which stealing other people’s stuff is legitimized and made permanent. The only way an elite can be made permanent, let alone hereditary, is if a state is set up in such a way that allows for the designated elite to remain.

One would think that a publication located in Great Britain – which, after all, has a monarchy and used to have an active aristocracy – would appreciate this simple fact.

The rest of the article works through the exercise of resolving the supposed tension between the above two principles. In the end, the magazine argues that the estate tax should remain, primarily because it is the “least distorting” of taxes.

Unlike income taxes, they do not destroy the incentive to work—whereas research suggests that a single person who inherits an amount above $150,000 is four times more likely to leave the labour force than one who inherits less than $25,000. Unlike capital-gains taxes, heavier estate taxes do not seem to dissuade saving or investment. Unlike sales taxes, they are progressive. To the extent that a higher inheritance tax can fund cuts to all other taxes, the system can be more efficient.

However, Hans Sennholz argues in “The Envy Tax” that none of these arguments hold water.

Death duties are no painless levies, as the taxmen want us to believe; they actually affect the conditions and actions of three parties: wealthy owners, their heirs, and the public. Owners who created the wealth usually are aware of the confiscatory nature of their future estate levies and therefore may adjust their life styles while they are still alive. They may seek early retirement in leisure and play, enjoy their wealth, or give it away. Wealthy retirees support the fastest growth industry of our time, housing and entertainment of a large leisure class congregating in affluent retirement communities. Or they may redirect their talents and efforts toward estate tax avoidance or evasion in order to leave more wealth to the family.

The loss of capital is compounded by an army of tax accountants and attorneys who thrive on the administration and distribution of estates. The indirect costs of estate taxation often decimate productive capital as effectively as the death duties themselves. Billions of dollars are spent every year for devising and administering trusts and foundations which, loaded with tax attorneys and accountants, wage expensive battles with their counterparts in government, all frittering away productive capital. Many billions of dollars are sent abroad in search of reliable tax havens.

Death duties do not visibly destroy capital goods such as factories, oil wells, refineries, or stores; but the heirs may be forced to sell all or part of the estate in order to raise the cash needed for the tax payment. The cash consists of someone’s savings which will never build a factory or store, never drill an oil well, never manufacture a tool or die. They merely replace the capital consumed by government. When the death duties fall on a large private enterprise, many stockholders may take the place of the family paying the duties. Their investments are simple replacements of productive capital lost. The media may then speak of the “passing of an era.”

While The Economist recognizes that the estate tax forces heirs to sell business, farms, and homes to pay the tax, it pretends to come up with the practical suggestion that heirs should be allowed “to pay the duties gradually, from cashflow rather than by fire-sales.”

Because after all, what matters to The Economist is that government gets the revenue it deserves.

The magazine closes its attempt to have a “sensible discussion” on the issue by articulating three “design principles” behind an appropriate estate tax: target the wealthy, keep it simple, and reduce other taxes.

The Economist‘s last principle is the most ridiculous. Government are rarely inclined to reduce taxes while putting new taxes in place.

Rather than focusing on how a tax that shouldn’t exist be designed, I have an even better idea.

How about if governments stop getting involved in monetary policy, stay out of the affairs of other countries (and the affairs of its constituents, I might add), and protect property rights?

While this wouldn’t be anarcho-capitalism by any stretch of the imagination, these moves would lead to far smaller governments, thereby reducing the amount of taxpayer money needed, cutting the number of parasitical elites that would live off of government largesse, and eliminating the need for a death tax.

Your welcome, Economist.

I solved your problem for you.