In his July 6 Op-Ed, law professor Ray D. Madoff made a case for the estate tax, claiming that it promoted tax fairness and economic growth. Madoff is wrong on both counts. The estate tax violates common principles of justice and stifles economic growth. Congress should permanently lock in this year’s special moratorium on the estate tax.
One standard argument against the estate tax is that the wealth of the estate was already taxed (perhaps several times over) while being accumulated. Madoff doesn’t deny that the estate tax represents “double taxation,” but he claims this is normal: “When a person earns $50,000 and then pays his mechanic $2,000 to fix his car, the mechanic cannot avoid taxes by claiming that the money was already subject to tax when earned by his customer.”
That analogy misses the reasons many people consider the estate tax particularly unfair. When someone spends a lifetime working and saving and then wants to pass on the fruits of his or her efforts to others, that motivation is qualitatively different from giving money to someone in order to receive goods and services in return. People give gifts to their children. Nobody pays their children for the “service” of being heirs. Consider the gulf between that view and the terminology Madoff uses.
He writes that heirs and private charities that receive sums from estates this year — when the estate tax has been temporarily phased out — benefit from “Congress’ largesse.” The heirs and charities actually benefit from the largesse of those who chose to bequeath money to them. The U.S. government did not give the heirs and charities anything. It is not largesse for the government to allow anybody to keep more of what they earn themselves or what someone else gives them.
Madoff revealingly evaluates the winners and losers in the case of Dan Duncan, who died this year and passed on billions of dollars to his family and favorite charities. “The one person who absolutely cannot benefit is Dan Duncan himself,” Madoff says. “When Duncan died, he was separated from all his property by a force even more powerful than the federal government.”
Madoff is clearly wrong, and this isn’t a metaphysical argument. Duncan was presumably much happier on his deathbed knowing that he, rather than D.C. politicians, could pick the people and causes that would be funded with the wealth he earned. Knowing that he might die in 2010, Duncan could have amended his will to give the same amount to the U.S. Treasury, as would have occurred with an estate tax. He didn’t, which proves that Duncan wanted more deserving recipients.
Beyond issues of fairness, Madoff claims that reinstatement of the estate tax will help the economy: “[T]he wealthiest 1% of Americans own more than 33% of the country’s wealth…. Studies consistently show that high concentrations of wealth correlate with poor economic performance of the country as a whole.”
Studies also consistently show that countries with lower tax burdens have higher economic growth and greater reductions in poverty than ones with high tax burdens. And even for a given amount of taxation, studies show that taxing wealth, which is what an estate tax does, is particularly harmful to growth.
Madoff’s snapshots of wealth concentration ignore the large turnover in these aggregate statistics. In other words, “the wealthiest 1%” is not the same group of people, year in and year out. If a sole proprietor who normally earns $45,000 a year comes up with a new product and suddenly earns $5 million, this wouldn’t show up as a boost to the middle class. Instead, it would appear as yet more concentration of income in “the top 1%.”
Indeed, a recent analysis by the Tax Foundation shows that almost 60% of the households in the lowest quintile of income in 1999 had moved into a higher quintile by 2007. In the same period, of all the people who earned more than $1 million in at least one year, about half did so just once.
The estate tax is intuitively unfair and economically harmful, which are good reasons why legislators should not reinstate it. The U.S. economy features a large degree of mobility, and those who want to spread prosperity to the least fortunate should favor lower government hurdles to wealth creation.
Robert P. Murphy is a senior fellow in Business and Economic Studies at the California-based Pacific Research Institute. Contact him at [email protected].