If the owner leaves a will stating that ownership is to be transferred to an heir upon his death, is it not immediate? If it were, then the 5th would apply to the heir right? I’m betting there is probably some law or agency that injects itself between the orignal owner and the heir upon death to get around this. Right?

Thanks for the info.

There are a few problems with making a 5th Amendment claim:

1) The Constitution doesn’t apply to the dead.

2) Even though estates currently receive representation in the courts, the nature of that representation is not to make the estate a thriving, growing entity but rather the point of representation is to end the estate. An estate will can only win a property rights dispute if it has something to do with the final valuation of the estate, not what to do with the estate.

3) The 5th Amendment only counts when the government forcefully takes property without providing the owner proper consideration. I think the deferment of taxes during life could certainly be considered proper consideration.

You asked lot of questions but Iâ??ll try to be brief as possible. Sorry this is so long.

You asked, â??I’m not saying that the government would put the money to better use, I was asking the question, if estate tax is a problem, what else might we do?â?

Answer: Get rid of the estate tax. Get rid of most other taxes. Get rid of regulations that hamper free markets. You get the idea.

You stated: â??All you’ve told me is that you think the very concept is immoral, presumably because it violates the principles of the free marketâ?¦â?

Answer: It would take more room than a blog post to fully explain why it’s immoral, but here is a summary: It is immoral because it attempts to deprive an individual of his right to his property. Ayn Rand stated the following â??The Virtue of Selfishnessâ?:

The right to life is the source of all rightsâ??and the right to property is their only implementation. Without property rights, no other rights are possible. Since man has to sustain his life by his own effort, the man who has no right to the product of his effort has no means to sustain his life. The man who produces while others dispose of his product is a slave.

The rights in question are that of the producer of the wealth. The right to property includes the right to use and disposal. The producer has the right to choose who will be the beneficiary upon his death. The heirsâ?? right to the property is derived from the right of the producer. Therefore, to deny someone their property is to deny them their life. The fact that they are now dead does not mean that you didnâ??t deny them their life while they were living by enacting laws to dispose of their property undesirable ways. That is why it is immoral. The preceding was paraphrased from an article by Nathaniel Branden.

You asked: â?? You’ve said that inter-generational wealth accumulation isn’t a problem. Why not? Could it be? Is it actually preferable? How about some pros and cons?â?

Answer:
Why not a problem?
Inter-generational wealth accumulation in itself is not a problem. Wealth is not a static thing. Capitalists create wealth. Wealth creation is not a zero sum game. Another person possessing wealth does not prevent me from creating new wealth.

Could it be a problem?
It could only be a problem in a statist or mixed economy. In a statist or mixed economy, the bar is raised much higher for new capitalists. Taxes, licenses, fees, and other trade barriers make it harder for new competition to emerge and knock the incompetent heir off the top. This can allow incompetent heirs to hold onto their fortunes through government favor and protections.

Is it preferable?
Yes, it is preferable in a free market. Wealth accumulation by someone is necessary for the investment in capital regardless of whether itâ??s bank or a rich heir. Savings and investment in capital are what produces wealth.

We do not currently have a free market economy. To argue that we should have a death tax since we live in a mixed economy is to compound the problem. Doing so would be attacking a symptom rather than the cause. The way to achieve a free market is to peel of the layers of crap one at a time; not add more crap as a workaround.

Iâ??ll throw this in for good measure: The 5th amendment to the constitution states, â??â?¦nor shall private property be taken for public use without just compensationâ?.

When we look at estate tax, from a libertarian perspective, we have to first ask if anyone’s civil liberties are being violated. The dead do not have civil liberties. Period. However, prior to death people do have the freedom to contract and gift their possessions away (a will.) As such, the inheritors receive a windfall which should be taxed as a gift. What those tax rates should be is a debate for another time. There is no explicit right to inheritance which means Congress may legislate the issue, and even outlaw it if we so choose.

But let’s get back to the original question of does the accumulation of wealth through inheritance pose a problem? I would say that the accumulation of wealth is not an immediate concern of the Federal government. Individual states may have a more imminent concern because the accumulation of wealth within a state or city may have more immediate effects.

The only way the Federal government could possibly be concerned about the accumulation of wealth is if they decide it falls under the Commerce Clause of the Constitution. Now, the Feds have used the Commerce Clause to argue some really bizarre causation issues and I cringe anytime the Clause is brought up because it always smells like an abuse of Fed power.

The accumulation of wealth doesn’t necessarily mean the transfer of cash. What if it’s the transfer of stock in a family owned business? Does the nature of stock ownership translate to an imminent concern to a local government? It doesn’t seem like it but what if it were real estate? One family could come to own a majority of a town through inheritance. Is that a local concern? Could be. It’s a tough nut to crack.

I’m not saying that there IS a current problem with inter-generational accumulation of wealth, I’m just exploring the topic. I don’t think we can just brush off the possibility that ever greater concentration of wealth in a comparative few could be a problem that has grave implications for both our economic and political systems.

I’m not saying that the government would put the money to better use, I was asking the question, if estate tax is a problem, what else might we do?

All you’ve told me is that you think the very concept is immoral, presumably because it violates the principles of the free market, and that I shouldn’t fret, because these hypothetical heirs might, after all, lose it. Well, that’s the obvious ideological answer, but it doesn’t really address the question. You’ve said that inter-generational wealth accumulation isn’t a problem. Why not? Could it be? Is it actually preferable? How about some pros and cons?

Oh, (and this isn’t directed at anyone, in particular) I’m all with William’s comment on the American farmer.

For the record. there is no such thing as a death tax. Period. The dead are not taxed, they can will their wealth to anyone or any group without paying any tax to do so.

HOWEVER, if the recipient of an inherited wealth transfer gains a windfall (i.e. a large amount) and they are not a charity. Then there is a tax on this unearned income. Which is only proper.

Taxation inevitably causes market distortion, the last thing you want to do is to heavily tax work. But to heavily tax unearned income causes the least distortion, and when you use this windfall tax to reduce taxes on productivity, then you get a net benefit.

Now, I think you agree with this, which makes it surprising that you would throw away the main benefit of your clear thinking by tolerating the loaded and inaccurate term ‘death tax’.

Bryan, an alleged libertarian, posted a long socialist diatribe in favour of the “death tax.” Not only does he praise this evil bit of the tax code, he wants to increase it, maybe even to 100%! Several commenters have given…

The “death-tax” is evil, full stop. I like Mark’s comment too.

There is no problem of “inter-generational accumulation of wealth” to combat. By what principle would it be necessary for the government to strip the property of an heir? Do you think their property really belongs to the collective and now they must return it?

As I stated before I think this is immoral and can be dismissed without needing to discuss the economics it. However, just as in any other case, the market should determine what happens to it. If the heir is not industrious enough or is irresponsible, they will not be able to hold on to their fortune and will either squander it or lose it through poor investments. I’m sure you’ve heard the old adage: “from shirtsleeves to shirtsleeves in three generations”. If they are savvy businessmen and manage it properly, then why shouldn’t the money be in their hands? Surely you don’t think the government could make better use of it do you?

“When you raise the death-tax you can lower the income tax on the working and the living”

True, but let’s look at the numbers. Right now, the estate tax makes up about 1% of federal revenues, with a tax rate of 55% on the largest estates. Even if we increased the rate to 100%, how much more revenue would this bring in? After considering the effect of your proposed exemption for family businesses (which make up a not insignificant portion of current estate tax revenues), you would be lucky if revenues doubled.

The income tax brings in more than 40% of federal revenues. (With payroll taxes making up another 30+). The increased death tax would barely make a dent, allowing the average person’s income tax rate to be lowered by a fraction of a percent.

This hardly makes increasing the death tax look like a promising approach to getting income tax rates reduced.

“1) Lower the income tax rate as low as possible”

Fine – I’ve got no problems here, but as I noted above, increasing the estate tax is not going to do much to help get there.

“2) Raise the estate tax as high as possible. I have no problem with this being at 100% with some notable exception.”

A 100% estate tax is perfect if your goal is to punish dying people, but not so smart if your goal is to generate revenue. Anyone with a sizable amount of liquid wealth is going to move it into trusts to avoid losing it all. The main effect of this will be to make these kinds of trusts extremely popular with middle class taxpayers, rather than just the wealthy as they are now.

“Family farms and small businesses should be excluded entirely.”

This will have some seriously perverse incentives for older small business owners who want to be able to leave something to an heir.

In some cases it will mean foregoing a retirement, because if they choose to sell the business their heirs will get nothing, whereas if they keep working until they die, their heirs will inherit the business and then be free to sell it for the money.

In other cases it could mean keeping alive a business that is marginal or even losing money. If they sell the business or close down and liquidate the assets, the heirs will get nothing. If the keep the business running until they die, even while bleeding away savings (which are worthless after they die anyway), the heirs can then liquidate the business, possibly for a substantial amount of money.

“As would bequests to spouses and minor children.”

This creates some even more perverse incentives and is also a recipe for family problems.

Suppose you are suffering from a terminal disease and you have a child who is approaching 18 years of age. You might prefer to let yourself die (refuse heroic measure, stop taking medication, etc.) when you could leave your child an inheritance, rather than risk living another month past their birthday and leaving them with nothing.

Even worse, it could cause people to pass up potentially successful treatments. Suppose in the situation above, you were suffering from cancer and were told that with chemotherapy you had a 20% chance of being cured, but a 80% chance that you would relapse within the year and die. Most people now would gladly take the 20% chance of life. But imagine the decision was between a 20% chance of living and an 80% chance of leaving your 18 year old son completely broke, versus dying now and leaving a decent inheritance.

Of course these kind of situations aren’t going to happen to everyone, but given the extremes people will go to to provide for their children, they will occasionally happen, and a tax system that encourages this kind of thing is disgusting.

Now consider the situation where you are dying and you have one child who is over 18 and another who is under 18. Do you leave the younger child with everything and leave nothing for the older? Most parents would be revolted at being forced to do that. Do you try to be “fair” by not leaving anything to either one? That’s even worse.

“Taxes could be deferred or amortized on the family home for a certain number of years. There may even be room for a fixed exemption amount for family heirlooms and the like. The goal here is not to force the heirs to sell items with personal significance simply to pay taxes;”

Later you complain about the tax code creating incentives that distort people’s behavior, but here you’ve done that on an enormous scale by giving special treatment to tangible property. Suppose you have a good deal of money saved up and you want to leave it to your children. What do you do? Buy a more expensive house.

“3) Combine the sales tax and gift tax into one “Transaction Tax” and lower that rate. There is no reason that $500,000 spent on a house is any different than $500,000 spent on a boat. And there is no reason that $500,000 given to your children is any different than $500,000 spent on a house. In every case, you are the one who has earned the $500,000 and you are the one who knows what use of that $500,000 will bring you the most happiness. The government should not be trying to influence you by taxing any of these decisions at different rates.”

But currently, the gift tax and the estate tax are at the same rate. Why? Because they essentially tax the same thing. There’s a lot more difference between buying a boat and giving someone money than there is between giving someone money now and giving that same person money later (even if later happens to be when you die).

Yes, it’s unfortunate when taxes distort people’s behavior, but your plan only makes these things worse.

Besides, some would argue that there is a relevant moral difference between taxing sales and taxing gifts. In the case of sales, some would argue that the legal infrastructure necessary for the existence of thriving markets and businesses is provided by the state, so the state is justified in taxing these transactions to pay for it. Free gifts have no such justification.

Also, you’ve made a huge jump from gift, income, and estate taxes (which are federal) to sales tax (which is purely a state matter – some states don’t have a sales tax). This makes absolutely no sense unless you’re suggesting a national sales tax (which opens a whole new can of worms).

“I’m selfish and it really burns me up when the government takes more of my money, money that I have worked hard for, instead of taking money from someone who has done nothing for it.”

So property received as a voluntary gift is less legitimate than property received as a result of an exchange? You don’t give any moral justification for this beyond “I’m selfish”, and this seems far from obvious to me.

“Contrary to its name, the death tax is not a tax on dying, nor is it a tax on the person who has just died. Kick a dead person sometime. They don’t feel it. They don’t even know that you kicked them. They also don’t know that you taxed their estate.”

So by this logic, you would support mandatory organ donation? Maybe you do, I don’t know. I’m just curious if you’re willing to carry your argument to it’s logical conclusion.

And as others have already commented, they DO know before they die that their estate will be taxed and they will take action accordingly.

“While I feel sorry for their loss, from a tax perspective I’m more inclined to want to help those working and producing than those benefiting from death.”

No, you’re benefiting those who are currently working over those who possess wealth due to previous work.

“People might say I’m punishing those who die suddenly, I would say I am eliminating the punishment on those who are working.”

First of all, as I pointed out above, the estate tax is miniscule compared with the income tax. But the real issue is where this imaginary connection between income tax and the estate tax comes from.

This effect is very obvious in State politics. States will frequently propose new taxes and justify them by claiming that they will reduce the burden from existing taxes. If they succeed in imposing the new tax, within a short period of time, the reduced taxes have grown back to their previous level.

The only way this would have any practical effect is if the increased estate tax (possibly in conjunction with other increased taxes) was sufficient to completely eliminate the income tax. Otherwise, any offsetting effect will be temporary at best.

“There are a lot more people who are working than those who die suddenly.”

But it’s not just people who die young who will be hurt. People who plan to avoid having all their wealth taken by the tax will be affected. Elderly people who give away the bulk of their money while they’re still alive and live on a small amount, people who establish trusts and live off a fixed income, people who tie up all of their wealth in physical property to exploit the loopholes – these people will have an unnecessarily lowered standard of living, and the potential for serious financial hardships that they would not have had to experience. This all comes about because death is unpredictable, and leaving money in a will rather than giving it while alive is a way of dealing with the unpredictability.

Of course, the heirs of someone who dies especially suddenly will be hurt even more. Imagine two scenarios: In one, a 60 year old man finds out he has untreatable cancer and only 6 months to live. He has time to get his affairs in order and arrange to give away the vast majority of his wealth while he is still alive. Another 60 year old man is suddenly killed in a car crash. His heirs in addition to having to deal with the suddenness of the death and the disorganization will receive nothing. Talk about kicking someone when they’re down.

“Raising the death tax is the way we give more choice to the wage earner. By raising the death tax we can give the those working more of their income from the beginning. With income in hand, the choice of where to spend it is entirely that individual’s. If he wants to give it to his adult son, he can. He just can’t wait until he dies to do so.”

Here, you seem to recognize that people will largely be able to get around losing everything to the estate tax by planning ahead, but you don’t seem to take this into account at all when you consider the estate tax as a source of revenue.

“(Furthermore, I would argue that leaving something to someone after you die is hardly a choice at all. Choice involves some sort of sacrifice. It involves choosing something you want over something else you want. Once you’re dead and can’t spend the money yourself, giving it to someone you love is pretty much a no-brainer.)”

I fail to see why you want to glorify giving things away when you still have use for them over giving them away when you don’t. It’s equally appropriate to look at this in terms of prudence. Giving away all your money when you may have unforeseen needs for it is unwise. Leaving an inheritance is a way of avoid this. Sure, giving things away when they are still useful to you is more generous, but since when is it the job of the tax code to engineer generosity?

I’m not going to defend the double taxation argument, because I don’t really think it makes sense. Any choice to impose one kind of tax and not another burdens some more than others. Two different taxes that overlap in effect are merely a way of taxing a particular segment of the population (those effected by both individual taxes) at a higher rate.

“The second knock on the “double taxation” argument is fairly simple: if you’re against double taxation, let’s lessen it on the front end. If we eliminate the income tax, no more double taxation when we take it from the dead. Heck, even if we can’t eliminate it, we can substantially reduce it, thereby lessening the amount of double taxes we are forced to pay.”

Once again, you haven’t shown how increasing the estate tax will help to reduce the income tax, much less eliminate it. This is doubly true once you consider the effects that raising the rate will have on it’s revenues.

“Once they have children, yes they want their children to have good lives, but if questioned I think most parents would want their children to have high paying jobs rather than live an extravagant lifestyle on the sweat of the parents.”

And your plan actually undermines this. Many people who have earned a substantial fortune are reluctant to give their children money when they are still fairly young, preferring that their children create successful careers for themselves first. They don’t mind leaving an inheritance though, because usually, by the time their children receive it they have already long established their own careers.

Under your plan, these parents would be faced with a choice. Give your children substantial amounts of money when they are still in their 20′s and 30′s, or risk dying without giving them anything whatsoever.

“Take that away and they might retire earlier.”

Or they might keep working longer, as I pointed out above.

“Not only do you give them more of their life to enjoy…”

Or you encourage them to adopt a much lower standard of living, as I pointed out above.

“but you create job openings for younger workers. You create an even greater opportunity for mobility that rewards hard work and good decisions.”

This is the most bizarre statement in the whole piece. It only makes sense if you assume some kind of strange zero-sum economics where elderly workers do not provide any economic gain.

“In closing, I state that one of the added benefits to this system would be the increased consumer spending that helps drive our economy. The decreased incentive to save large fortunes would lead to more spending, which in turn creates more jobs, raises salaries and improves the standard of living for everyone.”

This is a pretty controversial claim. A sufficient level of savings is also essential to a solid economy. It provides the backing for loans and mortgages that are especially important to small businesses. It also acts as a buffer to lessen the effects of economic downturns. Increasing spending primarily by draining savings is not necessarily a good thing for the economy.

Keep in mind also, that it won’t just be savings, but all investments that suffer from the same disincentive. I find it hard to believe that that will be good for the economy.

“Truth be told, I imagine most of the revenue under this plan would be generated by the transaction tax and increased spending.”

And here you admit that your tax proposal is actually a huge exercise in social engineering through the tax code. Why were you so concerned by the difference between sales and gift tax rates?

Sorry for the length, but this post was just crying out for refutation.

It seems to me that the primary reason to have an estate tax is to combat the inter-generational accumulation of wealth. Is this an actual problem? If it is, what else could we do to combat it?

Yeah, if you own the policy, then it’s value gets taxed, but you don’t have to own the policy. Someone else can or you can set up a trust for the purpose as well.

1) The government doesn’t need just revenue, they need revenue flow. How would the lower income tax change the revenue flow to the government? Would it be workable? I know you said you’re not an economist, but if your suggestion is going to have any credence then isn’t this something we should know?

2) What makes you think that money I inherit will not be spent the same way as my paycheck? Why should the former be taxed so little and the former taxed into oblivion if I will treat the money exactly the same?

3) According to your statement, bequests would be exempt. I realize your not really attempting to write the tax code, but that’s a major loophole. Why not just transfer a majority of my wealth into valuable paintings and then bequeth them?

4) Why is preserving a family business more important than preserving the cash someone received for selling their family business years before their death? The assumption is that the inheritors are making their living from that family business. If that’s true, then why didn’t they take measures prior to the death to secure against such a scenario? What about someone who’s job is to manage their parents investments? When their parent’s estate is taxed into oblivion then does that mean they lose their job? Why are jobs within a small business more valuable than a child helping to manage their parents investments?

5) How long do you think it will take for the population to adapt their finances to mirror, as much as possible, the allowed exemptions?

6) What if I inherit an exempted family business which I did use, prior to the inheritance, as my primary source of income and then sell it a year later? Is the sale taxed 100%? If not, what makes invested capital more important than capital free for investment?

The point I’m trying to make is that any time we involve exemptions we are putting a value, by definition, on certain types of behavior and by your own essay those incentives should not exist. So if we’re going to tax estates into oblivion, do it to all of them. I’m not advocating such a tax, I’m just trying to point out a few holes in the logic of it.