Comment by chimeracoder | Hacker News Reader

Comment by chimeracoder | Hacker News Reader

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> The estate tax has been nearly the best way of reducing wealth inequality, second only to the income tax.

That's an assertion that's often repeated axiomatically by non-economists, but it's not borne out by the data. Aside from the fact that the estate tax raises embarrassingly little revenue[0], the number of individuals who actually pay the estate tax is pretty low. Furthermore, it's inherently a tax that doesn't capture the true benefits of inherited wealth, and there's no way to to turn death into a taxable event that does - even if you imposed an estate tax of 100%.

Friedman has written an entire book explaining why the estate tax is inherently broken and unfixable. His criticisms of the estate tax are only controversial politically; they are generally accepted by economists, even those that don't advocate repealing the estate tax for other reasons.

> and there is a dearth of economic data pointing to it being only beneficial to society.

I'd agree that there's a dearth of economic data pointing to the benefits of an estate tax.

[0] $19.3 billion, which is about half a percent of total federal revenue, and not nearly enough to make a dent in wealth inequality

> the number of individuals who actually pay the estate tax is pretty low

A paper published in 2000 "began with an aggregate time-series analysis, and found that summary measures of the estate tax rate structure are generally negatively correlated with the reported net worth of the top estates relative to national wealth," which "is consistent with estate taxation reducing either wealth accumulation or inducing avoidance, or both" [1].

The simplest strategy for avoiding the tax involves gifting. "A couple with two children could divest itself of $1 million over a twenty-five year period simply by taking advantage of the gift tax exclusion" [2]. That grows if the couple contemplates gifts to grandchildren, spouses of children or grandchildren, et cetera. Another involves the "diversion of profitable investment opportunities" to heirs, e.g. by "arranging profitable business deals and then bring[ing] their children in as coinvestors". Lending to children at prevailing rates and guaranteeing their loans are related strategies. More sophisticated techniques include "preferred stock recapitalizations in closely held firms, installment sales, and life insurance."

TL; DR The estate tax does little to reduce inequality.

On a more meta level, it is interesting to observe that for "several decades, total revenues raised by estate and gift taxes have roughly equalled those raised by excise taxes on alcohol and tobacco" [3]. The estate tax attracts attention because of a fundamental disagreement, regarding taxes, in our politics.

"Broadly speaking, the tension is one between a desire for structural tax reform, which would move the tax system to- wards greater horizontal and vertical equity, and a desire for tax provi- sions designed to stimulate increased savings or capital formation. This tension produces a direct conflict between the need to tax capital or the income from capital in order to achieve a progressive tax burden and the perceived need to exempt capital and capital income from tax in order to induce economic growth" [3].

[1] http://piketty.pse.ens.fr/files/KopczukSlemrod2001.pdf

[2] http://www.nber.org/chapters/c10931.pdf

[3] http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?artic...

> is consistent with estate taxation reducing either wealth accumulation or inducing avoidance, or both

That's correct - as per the very first point in the article, people structure their assets to minimize their estate tax liability.

> On a more meta level, it is interesting to observe that for "several decades, total revenues raised by estate and gift taxes have roughly equalled those raised by excise taxes on alcohol and tobacco" [3]. The estate tax attracts attention because of a fundamental disagreement, regarding taxes, in our politics.

I'm not really sure why that's relevant? Unlike estates, we don't tax tobacco because of a desire to generate revenue or reduce wealth inequality. Tobacco taxes are actually incredibly regressive: the burden of the taxes is almost entirely paid for by the poor, so they increase inequality. But we tax it regardless, because we believe that the taxes contribute to a decrease in smoking nationwide.

> I'm not really sure why that's relevant?

The author is contrasting the disparity in attention given two two relatively-minor taxes with similar economic burdens.

> we don't tax tobacco because of a desire to generate revenue or reduce wealth inequality

Tobacco taxes are absolutely marketed as revenue raisers. They aren't intended to reduce inequality, but another perceived societal ill--tobacco use and nicotine addiction.

> The author is contrasting the disparity in attention given two two relatively-minor taxes with similar economic burdens.

The economic burdens of the estate tax and the tobacco tax could hardly be more different. One is explicitly targeted exclusively at the very wealthy, and the other is effectively (though not explicitly) targeted at the poor.

> Tobacco taxes are absolutely marketed as revenue raisers

I'm not really interested in how they're marketed; I'm talking about the economic policy-driven justifications for them.

> They aren't intended to reduce inequality, but another perceived societal ill--tobacco use and nicotine addiction.

That's the Pigovian tax argument, which again, is completely different from the estate tax argument.

> we don't tax tobacco because of a desire to generate revenue

>> I'm not really interested in how they're marketed

You're either being obtuse or didn't read my original comment and think I'm disagreeing with you. If Policy A is marketed as way to do X, it was passed, in part, as a reflection of a desire to do X.

I'm curious that gifting seems to be considered a main method of avoidance.

At face value from keeping it from the government, yes. However, it also distributes the money out of a single controller. This is actually huge, as it more quickly loves the money out of any sort of dynastic entity. Even removes some incentive from families for having to operate as a single unit.

What are the true benefits of inherited wealth?

Your family can be politically powerful for generations, just like the monarchs.

1) It's your money. You should be free to decide what to do with it.

2) If you can't decide what to do with your money, you have less incentive to work hard for it.

3) If your choice is either to spend your money frivolously or have it expropriated, you'll spend it frivolously.

4) Distorting savings and investment decisions is one of the most damaging forms of taxation. A tax on inherited wealth is a tax on savings.

5) It's very difficult to write down a theoretical utilitarian welfare model that suggests an estate tax is a good idea. (It's easy to write a model where inheritances are optimally subsidized.)

> It's your money. You should be free to decide what to do with it.

What about the money that I earn via direct income?

Why don't I have a right to all of that as well, considering the payroll tax or income tax?

Surely the government has no right to confiscate the direct value I know I've created.

Okay, the way I've stated it applies equally well to all taxes and doesn't specify why the estate tax is especially bad.

How about this: it's a form of multiple taxation. You pay income taxes when you earn the money. You pay taxes when you bequeath it to your children. Your children pay VAT taxes when they finally spend it. It's inefficient and unnecessary.

That, again, doesn't explain anything special about the estate tax (it's also inaccurate in the US, which has no generally applicable VAT). Sure, you can (in a particularly useless way) view any transfer tax as “multiple taxation” on the theory that the money will later go through some other taxed transfer, but that doesn't actually provide a coherent argument as to why a particular transfer, such as inheritance, is especially improper to tax.

One thing that occurred to me about the estate tax is that, to the degree that we can view it as a tax on wealth, the rate may differ quite a bit by demographic. I haven't looked at the numbers (it's not death rates alone, but death rates amongst those wealthy enough to be impacted by the estate tax, which is harder to get at) but that feels like it might be improper.

> it's also inaccurate in the US, which has no generally applicable VAT)

All but four states in the US have a general sales tax

Sales tax is not VAT, and even what in the US is called a “general” sales tax applied to a far more limited set of end products than a VAT would usually apply to.

> Sales tax is not VAT

From an economic standpoint, yes, a sales tax literally is identical to VAT. The difference is in the point at which the payment is collected; the incidence of the tax is absolutely identical.

> even what in the US is called a “general” sales tax applied to a far more limited set of end products than a VAT would usually apply to.

That's really not true at all.

"You pay taxes when you bequeath it to your children."

That is the estate tax. If don't have estate tax, then capital gains are never taxed.

Currently, the tax basis for capital gains is stepped up to current value when inherited. It would be reasonable to not require capital to be sold to pay estate tax. That could be accomplished by not resetting the basis on inheritance.

What about use taxes? Given it is a voluntary exchange, the government has the right to it, right?

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