by Henry Oliner
Our laws frequently have counterproductive consequences. We fail to combine hard headed reality with soft hearted intentions.
The estate tax has the objective of redistributing excess wealth to higher social purposes. The outcomes indicate this is more difficult that we suppose.
The first error is assuming that we will get better results distributing based on political interests than economic interests. There seems to be little correlation between high estate taxes and inequality. The second error is assuming that all wealth is equal. There is the illusion of Scrooge McDuck sitting on a pile of cash in his private vault.
Wealth is often in the form of illiquid capital. If the owner of a substantial business dies and his estate owes substantial taxes, he will be faced with either incurring debt to pay the taxes, which makes the business vulnerable, or the prospect of liquidating on an untimely basis. Such a liquidation could bring a poor price destroying the value of the business or it may be to a competitor who will reduce employment or liquidate part of his competition.
Most business owners who plan for such events take out expensive insurance policies to pay the tax, draining investable funds, or transfer shares to trusts and partnerships to avoid the estate tax. This is also expensive and a waste of valuable resources.
Many businesses sell to larger or public businesses in order to provide the liquidity they need for an estate event. This may provide some benefits to the company, but it also exposes them to cultural shifts and risks.
The estate tax is less of a transfer from the rich to the poor than it is a transfer from one group of wealthy to other wealthy special interests. The great beneficiaries of estate taxes are tax lawyers and accountants, insurance companies, and wealthier businesses who use the pressure of the estate taxes to acquire other firms and increase their market share.
Family ties are great motivators of wealth creation. Families who wish to pass on the fruits of their work and good fortune should not be taxed for doing so.
Wealth redistribution seems to take care of itself. As families grow in multiple generations the wealth gets naturally spread. Rarely does great wealth survive multiple generations. Partially this is due to the normal creative destruction as new industries replace obsolete concerns, and partially this is due to the lack of knowledge and discipline of subsequent generations to grow and invest wisely.
Wealth grows when knowledge and power converge. When these separate, wealth dissipates. Government has the power, but not the knowledge of producing wealth. When great wealth is passed on without the knowledge that created it, we get similar results.
A dynamic and growing economy will inevitably produce inequality. A complex administrative state does not mitigate this trend, it makes it worse. Other cultural trends have had an unexpected adverse effect on inequality. As women have risen in the workforce, successful women tend to mate with successful men. Decades ago a male executive may have married a secretary; today he is likely to marry a female executive. This increases household income and inequality.
High estate taxes encourage conspicuous consumption. Delaying consumption through investment will be sharply taxed; enjoying the Maserati, the club membership and the new yacht is not.
This is not to say that we should not consider policies to help the middle class and poor. But the best intentions, when unmoored from hard headed reality, will be found wanting.
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