Of Public Interest

Volume 2, Number 14
September 2000

by Richard E. Wagner

This study explains the fallacies behind several misperceptions that are commonly advanced in support of death taxation. One of these is that the tax affects only the wealthiest few taxpayers. It is often noted that the death tax hits only about two percent of decedents each year. Actually, the death tax affects far more than a wealthy few. For one thing, many people escape the tax only because they have gone to great lengths with their lawyers and accountants to do so. These people are not among the two percent of decedents who pay a death tax, but the various expenses they bear to escape the tax are equivalent to a tax, only the government collects no revenue.

Moreover, the death tax is a source of strong economic disincentive. A cardinal principle of taxation is that people will supply less of whatever is taxed. The death tax is imposed on the value of the capital that people have created. The higher the tax the less capital people will create. Among other things, less capital will be invested in business enterprises. With fewer businesses being formed and with less capital available to those that do form, fewer jobs are created in our economy and wages tend to be less than they might otherwise have been. In this manner, the economic losses from the death tax are diffused throughout our economy.

A second misperception is that abolition of the death tax would lose significant revenue for the government. It is true that the IRS collects about $25 billion annually from the executors of estates. This does not, however, mean that the government would lose this $25 billion should the death tax be eliminated. The economic gains just noted imply that elimination of the death tax would increase income and earnings throughout the economy. This, in turn, would increase the government’s yield from its taxes on personal income and payrolls. Several studies have projected that the increase in these other tax revenues would roughly equal the reduction of death tax revenues.

Yet other misperceptions are that the death tax promotes equal opportunity within society and that it encourages support for private philanthropy. To be sure, people have advanced many

Moreover, death taxes do not promote private philanthropy, even though President Clinton noted in announcing his veto that two billionaires told him that this was so. To the contrary, the death tax discourages private philanthropy. Too much is made of the ability of someone to avoid a high rate of death tax by making charitable bequests. What is overlooked is the negative impact of the death tax on wealth creation in the first place, which in turn reduces the support that people give to private philanthropy.

When the various misperceptions are corrected, the standard arguments in support of death taxation vanish. Indeed, the bipartisan support that Congress gave to abolition of the death tax is strong testimony to this point. Politics does not, of course, run only on principle. Other motives are also present, greed and envy among them. At its best, politics is a process whereby people agree to tax themselves to undertake projects of common benefit. At its worst, it is a process whereby Team A agrees to tax other people for the benefit of Team A, where the alternative would have been for the members of Team A to finance the desired project out of their own pocketbooks.

Someone who wants to see a wetland preserved on someone else’s land can always buy that land. All that is necessary to have the wetland preserved is a simple real estate transaction. The preservationists, though, would have to pay for their activities and projects. If they can get the government to do this for them, they can get other people to pay for their projects. Politically organized greed replaces ordinary, peaceful commerce in such cases.

It is the same with the death tax and President Clinton’s veto of its repeal. Among the reasons given up front for the veto was that not many people pay the tax and that those that do can well afford it. Death taxation was a plank in the "Communist Manifesto," and it was Karl Marx who articulated the sentiment "from each according to his abilities, to each according to his needs." For the American republic, however, private property and the family, and not Karl Marx and the "Communist Manifesto," express its core values. Abolition of the death tax would move us closer to our core values.

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