Dying in the Name of Taxation

On Monday I did a piece about aspects of the tax overhaul plan proposed by presidential candidate Dr. Ben Carson.  At the time, some of the details of the plan were not yet public, as the announcement was in the form of an interview on the Fox and Friends show, and the not all of the bullet items shown on screen were discussed.

Later in the day, as the plans were seen fleshed out a bit, I recalled one of the items which had been on the screen but not discussed by the candidate during the interview.

That was the item indicating the cancellation of the so-called "death tax", the Federal tax on inheritances which meet certain minimum value criteria.  Dr. Carson would favor its removal from the tax code in its entirety, if I read that correctly.  So I appended, in the form of a Comment, a note to that effect, wherein I wrote that I didn't necessarily agree with that plank.

Here's why.

I don't want to repeat myself too much, as I already did a piece on the topic last year that addressed my thoughts from a state perspective.  My point was that in any jurisdiction -- states, for the purpose of that piece -- there is a cost associated with the constitutional, mandatory functions of government.  Once you determine what those costs are, then you have a job to do in the sense of determining both the activities that will be taxed, and the way the needed income will be raised across the selection of taxable activities.

Several states, for example, choose not to have an income tax and, rather, raise revenues using sales taxes, usage taxes, property taxes, tolls and the like.  The citizens of that state determine by the ballot and their elected representatives how that is to be done and what preference they will use -- how the tax revenues will be balanced across the various sources.

When it comes to the Federal government, the principle is the same, pretty much.  However -- unlike the states, the Federal government has no obligation to restrain its spending to the money raised in tax revenues (called a "balanced budget", which you and I and most states have to have, but not Washington).  Also, Congress is dominated with career politicians, many of whom have lost their connection with their districts in favor of reelection at all costs.  The Senate, as well, by the Constitutional amendment taking its election from the state legislatures (and going to direct election), has resulted in more career politicians, less accountable to the needs of their state.

So when the tax code is written, we find that there are a large and diverse number of revenue sources, one of which being the death tax.

I look at the death tax as simply one of those sources.  In general, I follow the notion that, since you get less of something when you tax it, you want to tax undesirable activities hard, like smoking, and go easy on the things you want to encourage, like income and savings.  At the state level, where you find property taxes, that relationship is far less elastic -- people don't own "less property" because of real estate taxes, in the sense that someone is going to own it and pay the tax.  The Capital will get its due.

The case of the death tax is a bit similar.  The death tax doesn't keep people from dying, although it does generate a lot of tax-avoidance activity, such as trust formation and the like.  So we are not talking about that, as much as we are about how fair the tax is on principle.

Here is where I suppose I'd differ a bit with the good doctor.  On principle, as one of a variety of tax sources, I think that taxing inheritance is not evil in itself.  What needs to be done, however, is to look at all the unintended consequences -- not just the trust formation and pre-death giveaways, but the impact from a fairness perspective on certain inheritances and the difficulties it imposes.

I believe that someone's life savings are his to distribute and he should have the right to give it all to his family without Washington dipping its hand on the till.  But I feel the same way about income earned -- Washington doesn't deserve to pick at the fruits of my labors, let alone confiscate 40% of it (or, if Bernie Sanders had his way, 80%).  If all the things that government shouldn't tax were put together, there wouldn't be a lot of revenue.

So inheritances should be no more immune from taxation in principle than anything else.  But -- while someone saving $10 million in his lifetime ought to be able to leave it all to his heirs, it is not a specific hardship if a small percentage of it is taxed.  What is a problem is -- just one example -- when businesses or farms are inherited.  If that $10 million is in the form of an operating business, and the heirs not only have to take over operation but pay the government $500,000, say, for that privilege, and they have to sell the business to pay the tax, there's something wrong.

I'm sure that is what is on Dr. Carson's mind when he adds the death tax to the reform list.  And I get it, I really do.  I just need to note that I don't find the death tax to be innately wrong on its face, as long as it is structured in such a way as to avoid logistical difficulties for the heirs.  It's one thing to get an inheritance check for $10 million and write a check out of the proceeds for taxes.  It's quite another to be forced to sell an asset, let alone a business, to pay the tax.  That is not what the deceased likely intended.

Taxes are not only the other certainty in life, they are a burden whose weight can be spread in multiple ways.  I do not oppose their imposition, so long as the laws are carefully designed to avoid both abuse by heirs, and absurd imposition on them.

I think Dr. Carson would likely agree, right?

Copyright 2016 by Robert Sutton
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