Straight Talk About the 'Death' Tax: Politics, Economics, and Morality
This article examines the political, economic, and moral cases against transfer taxes. First, it argues that the rhetoric surrounding the effort to repeal the estate and gift tax--particularly the charge that it destroys family farms and closely held businessesis misleading and even disingenuous. Second, it demonstrates that the estate and gift tax does not threaten aggregate saving, labor supply, or economic growth as its critics maintain. Nor does it generate an insignificant amount of revenue, produce prohibitive compliance costs, primarily tax wealth that has already been taxed, or have no influence on the rate of charitable contributions, again, all of which critics maintain.
This article also challenges the assertion that transfer taxes are immoral because they prevent parents from passing along hard-earned wealth to children, and because they tax saving, not consumption. The fact that we care about our children does not make transfer taxes immoral, anymore than the fact that we care about what we consume makes consumption taxes immoral. More fundamentally, this article challenges the moral case against taxing wealth at death by invoking history. Americans have long considered wealth a civic right, not a birthright. Taxing inherited wealth fulfills a moral obligation in a liberal democratic society.
I conclude that the estate and gift tax should be reformed, not repealed. In the interest of preempting further calls to abolish the estate and gift tax, preserving one of the most progressive features of the federal tax system, and improving horizontal equity, I recommend raising the effective exclusion, broadening the tax base, and lowering marginal rates.