Republicans have long raged against what they call the “death tax” and while they have not eliminated it, they have changed it. In 2017 the estate tax applied only to individuals with total assets exceeding $5.49 million (doubled for a married couple). After the Republican tax bill passed, the number was increases to $11.8 million (doubled for a married couple). As should be guessed, this change impacts the taxes of very few people, but it provides a significant benefit for those who are already very well off.
The main reason advanced by Trump for this change was his claim that it is unfair that people pay taxes twice: once when they earn the money, again when their assets are inherited. This ignores the fact that those inheriting assets did not pay taxes on it when it was acquired, so it would only be a double tax if the tax was imposed on the dead person(s) who was taxed when they earned the assets. That said, the no double-tax principle is intriguing and could be taken as entailing that most taxes should be eliminated; but this is a matter beyond the scope of this essay. Instead, I will be looking at inheritance.
While inheritance is taken to be an ancient tradition and a basic right, there are rational arguments against allowing it at all. Also, as with any tradition and common practice, it would be an error of logic to infer that its traditional nature and common practice justify it in anyway. After all, people commonly do bad or stupid things for a long time.
One standard way to argue against inherited wealth is to contend that it has negative consequences. Mary Wollstonecraft contends that hereditary wealth was morally wrong because it produces idleness and impedes people from developing their virtues. While complicated to sort out, this does present an empirical claim: one could do a statistical analysis of the impact of hereditary wealth on idleness and virtue (although one must define the virtues for this analysis).
Interestingly, while Republicans and conservatives tend to aggressively oppose estate and inheritance taxes, they advance an argument that would seem to support eliminating inheritance.
One stock Republican argument against welfare echoes Wollstonecraft’s argument against hereditary wealth: it makes people idle and prevents them from developing virtues, therefore it should be restricted (or eliminated). Rod Blum, a Republican representative from Iowa, said “Sometimes we need to force people to go to work. There will be no excuses for anyone who can work to sit at home and not work.” Donald Trump, whose fortune was built on inheritance, has said that “The person who is not working at all and has no intention of working at all is making more money and doing better than the person that’s working his and her ass off.” While this might sound like description of Trump, it is apparently his criticism of welfare.
If the Republican criticism of welfare is correct, then it would also seem to apply to inheritance. After all, people do not earn their inheritance—they simply receive it. As such, if the Republicans are sincere in their arguments against welfare, then they must apply the same reasoning to inheritance and oppose it for the same reasons they oppose welfare. Obviously enough, they do not take this position—they advance one set of arguments against welfare, give another set in favor of protecting inheritance and see to it that the two do not meet.
While it is tempting to simply present this yet another example of inconsistency, it could be argued that there are relevant differences between inheritance and welfare that breaks the analogy between them.
One argument can be built on the fact that inheritance is passed on voluntarily from the possessor of the wealth to the recipient, while welfare involves taking tax money from some people who do not want some other people to get that money. A similar argument can be made by pointing out that inheritance usually goes to relatives while state welfare does not. While these are differences, they would not seem to be relevant to the argument that welfare is bad because it makes people lazy—after all, it is getting money that one has not earned that is the problem, not whether it was giving willingly or not or who it comes from. Unless one wants to make the implausible argument that money given by relatives is special and will not make people lazy.
Another argument can be made arguing that inherited wealth is earned in some manner while welfare is not. While this does have some appeal, it falls apart quickly. First, some people do earn some of their welfare (broadly construed) by paying for it when they are working. For example, if Sally works for ten years paying taxes and gets fired when her company moves overseas, then she is getting back money from a system that she contributed to. Second, if a person did work for their inheritance, it is not actually an inheritance, but something earned. If, for example, someone worked in the family business for pay, then they have earned their pay. But merely working there does not, obviously, entitle a person to own the business after the death of the current owner. So, this sort of argument fails.
In light of these considerations, if the Republicans are right that welfare is bad because it makes people idle and impedes their virtue, then the same would apply even more to inheritance. As such, if they are opposed to the harms of welfare and must combat them, then they must also oppose the harms of inheritance with an equal or greater intensity. If they don’t, one might think that they simply dislike poor people and like the rich.
It might be pointed out that if someone opposes inheritance, then they must oppose welfare. One reply is to accept this—if welfare does make people idle and inflicts moral harm. A second reply is to argue that welfare helps people in need and is analogous to family helping family in times of trouble rather than being analogous to inheritance, in which one simply receives regardless of need or merit.
Lest anyone start mass-producing straw men, my concern here is with large inheritances; I obviously have no objection to the sort of inheritance most of us will receive and I certainly have no issue with, for example, someone inheriting some of grandad’s Hummel collection or a few weapons from grandma’s collection of assault rifles.
Back in the early 1980’s, my then-girlfriend (now my wife) and I rented a floor in a charming little brownstone in a neighborhood called Cobble Hill, in Brooklyn. The real “gentrified” neighborhood was Brooklyn Heights, just a little north of us – but our neighborhood was safe, clean, and pretty much all first-or second-generation working class Italian.
I don’t know what Tony paid for the building when he bought it, but I do know that a brownstone in the Heights would have sold for about $25,000 in the early 1960’s, so this one would have been substantially less.
I also know that Tony worked is ass off doing all the repairs, upgrades, and maintenance himself – he did all the plumbing, electrical, carpentry, painting – and finished three very nice floor-through apartments that he rented, that provided the family with a very small income (after paying his federal, state, and local income taxes and the practically usury real-estate taxes in the neighborhood).
Tony himself lived with his wife and daughter on the ground floor, with a rear entrance that opened up to a little patio and a garden that his wife, Gertie, maintained.
So over the years, the neighborhood became more and more gentrified, rents went up but so did taxes – but Tony and his family had a home and a pretty viable family business to leave to their daughter and future son-in-law.
When we left Brooklyn in 1986, the brownstone was worth in the neighborhood of $700,000. Today that figure is closer to three or four million.
The building is an asset – and upon the death of the two of them (they’re long gone by now, so at this point the story becomes hypothetical), the daughter is left with a few million in real estate but no cash; she is running the family business (renting out the three apartments and maintaining the building).
And along comes the Federal Government, with its hand out, demanding half the value of the building, in cash, within a year of the date-of-death of whichever of her parents went last.
We are now talking about a forced sale, regardless of what the market conditions are, and a young woman losing her business and her home because she has to take what she can get for it, despite the sweat equity her parents (and probably her, too) put into the place over the years. The government does not care if the market is soft, they do not care if there is a housing and real estate crisis that drops home values by 30% or more, like there was from 2008 – 2012; they want their money and they want it now.
This story is repeated throughout all of Brooklyn, Queens, Jersey City, Hoboken – and in rural areas where generation upon generation of farmers eked out their living on land their ancestors got very cheaply, but suddenly the land is worth millions to investors and developers, and children are forced to sell it just to raise the cash to pay the inheritance taxes.
You paint a picture of fatcat millionaires like Donald Trump or Richard Hilton, awash in cash with spoiled brat kids who don’t know what work is, jetting around the world “being famous for being famous”, and it’s true, that does exist, and one can easily conclude that it’s not “fair”, but it’s not up to the government to guarantee fairness of outcome.
But those fatcats aren’t the ones who would be affected by an estate tax – not at all. They have plenty of lawyers to set up trusts, they park plenty of their cash in sheltered assets domestically and abroad – and they all review their financial plans annually and buy life insurance to cover the estate taxes.
Those who would be punished by this tax would be the heirs of guys like Tony, who don’t have the financial savvy to do “estate planning”, who are only rich on paper, with all their wealth tied up in a single asset that was more aimed at providing a home and a living for the family than getting rich.
Of course, I’ve talked about my cousin Rich in this column before – and how through his own sweat and know-how he turned an odd-lot of Western Wear into a brick-and-mortar shop, then two shops – the land and structures are worth a ton of money but not as much as the good-faith valuation of the business – one that his two sons helped him build and help him run. On his death, there’s the government again – hand out, demanding payment in a year. The probate judge would weep real alligator tears if these two young men, now with families of their own, were to have to liquidate their business in a down market just to pay those taxes. Walk down the street in your town with your eyes open, and you will see plenty of these paper millionaires – they’re the ones who started a hardware store and now have three – each one being managed by a different one of their children. They’re the Chinese couple who own the laundry (wait, is that racist to say that?) but when you look at the books you see they own two or three, plus a half-interest in the Chinese food place around the corner – and they rent the apartment upstairs to some young family and they own their own house outright. And they come to work every day and sweat it out, and all their assets are illiquid, and everything has to go on the auction block to raise the money to pay the taxes.
After I left Brooklyn, I spent a few years as a life insurance agent and got my certification as a financial planner; I worked closely with a couple of accountants and a few estate attorneys – and we would sell first-class “second-to-die” whole life policies to ultra-rich heads of families. The premiums were low, because the actuarial cost of insuring two lives was low – but the insurance amounts were at least in seven figures, sometimes eight and even nine. When the parents die, the children get tax-free life insurance paid directly to them, outside of probate and outside of the reach of any creditor or outstretched government palm. They use that money to pay the estate taxes, and preserve all of the assets their parents accumulated – the mansion, the summer “cottage”, the Bahamian island, the business, and whatever else gets piled in there. (The rest of the plan usually involved trusts for the kids, further sheltering the inheritance from greedy government paws, but that’s another story).
Extremely wealthy people are not going to be “brought down” by any tax law; and to approach tax law with that as a goal, or with the goal of “closing the wealth gap” is only going to hurt hard-working Americans, many of whom are first- and second-generation immigrants who realized the American Dream through hard work and perseverance.
Of course, to one of the points you made in your essay, I would answer that “to provide for their family and create wealth and/or opportunity for their children and grandchildren” is exactly the motivation behind the hard work to build the business in the first place – at least it is for so many people. Take that motivation away – tell those people that they are building their businesses to ultimately give them to the government, and watch as the spirit of innovation and entrepreneurship die a not-so-slow death. What would be the point of all that work? Much, much easier to get a job – preferably a government job with great health benefits and pension – work your 20 years and retire at 45 or 50, then get another job while you collect your pension – and if you want to leave anything for your kids, just buy a bunch of life insurance.
Eliminating the estate tax exemption will create a boon for lawyers, attorneys, and insurance agents. It will not even come close to touching the fatcats in any meaningful way. It will destroy what hard-working middle class people have already built for their children and grandchildren, and undermine the incentive of many to go to the trouble of starting and building a business.
Of course (and here’s the real reason this is being discussed) it will put lots more cash in the hands of the government. Our beloved representatives and senators will carefully consider how to spend it where it is needed most. Welfare? Hmmm – well, what would the ROI be on that expenditure, in terms of votes-per-dollar?
Michael LaBossiere says
It seems that the solution would have been to transfer ownership prior to death.
I certainly get the intuition that parents have the right to pass on their wealth for free to their kids, but it is not clear why this justifies a special exemption. To illustrate, suppose that Sam and Sally have a business and build it up. Bobby, who is not related to them, works hard at the business and helps make it a success. Billy, their son, also works as hard as Bobby. Bobby and Billy are both paid as employees. If Bobby acquires the business, he must pay for the acquisition. So why should Billy get it for free? What is it about being related that justifies the exemption?
You could say that people should be able to give away stuff without any taxes, but this would entail that it should apply everywhere. Of course, this might be seen as a good thing. I know I’d not be too sad to get my full pay check because FAMU decided to give me my pay without wanting the feds to tax me. And, we are all related in some way-so that could be used to justify it. 🙂
Also, even if taxes must be paid on such inheritance, it is like paying taxes on a big lottery win: yeah, it sucks to have to pay some of the money you got by pure luck. Now, if someone has worked hard in creating the value that they will inherit, the obvious solution is ownership transfers and compensation before death.
Back in 1916, John and Walter Wegman partnered up and sold produce from pushcarts on the street here in town. They built a supermarket in 1930 which they left to Walter’s son, Robert. Robert expanded, built more stores that turned into a little empire, which he left to his son, Danny. Today, as a direct result of the ability for this business to pass untouched from one generation to the next, Wegmans has just under 100 supermarkets all over the East. As one of the largest private companies in the country, they employ nearly 50,000 people, and are consistently ranked among the top companies to work for in this country, considering salary, benefits, upward mobility, quality of life and job security. That’s 50,000 taxpayers, in government-speak.
Had the Wegmans been taxed on their business, Robert Wegman might not have had a business to expand; the store that Walter and John built would have had to be sold to pay the taxes, and Robert might have said “Why bother?”
But there’s more, of course. At my university, we just opened up a state-of-the-art studio and production space designed to facilitate collaboration between our students and local business – a joint effort between the State of New York, Dell (there’s another one), Cisco, and – you guessed it – Wegmans. The entire motivation behind this investment is to revitalize the economy and industry in this region. At the same time, Wegmans just joined forces with a few other local foundations and built a brand-new Wellness and Rehabilitation Institute on the campus where my wife works. The Wegmans foundation gave away 14.5 million pounds of food to food banks last year; they invested in scholarships for need based students, they gave millions to the United Way, to employees in the form of scholarships, to infrastructure improvements and youth sports organizations and facilities. Oh, and they offer grant funding for projects designed for “human services and education”.
That’s of course only one example, all that wealth, all that employment, all that charitable giving, all that infrastructure investment, all that community service, all those university buildings and departments – all potentially cut short by a short-sighted tax law focused on “fairness”.
If you scratch the surface, you will find relatively few families like the Hiltons or the Kardashians, and far more like those in my first post, or like the Wegman family who have built a multi-billion dollar dynasty only to form charitable foundations and give huge sums away to worthy causes – causes that actually do something to better people’s lives, not just go down the rat-hole of politics, “pay-to-play”, and pretending that “funding” somehow equates to “accomplishment”.
Michael LaBossiere says
But this means that the other people who would have competed with Wegmans were unable to do so in part because they were able to pass on their empire intact. That is, once a family starts winning, they can pass on the win to the disadvantage of their competition.
One might argue that we need such philanthropy because wealth is so concentrated (in part by inheritance). If people were compensated more equitably, then normal folks could have the extra cash to donate. But, since wealth is concentrated, so is charity. So, saying we need to protect inheritance to protect charity is to say that we need to protect the system that requires charity in order to protect charity.
” If Bobby acquires the business, he must pay for the acquisition. So why should Billy get it for free? What is it about being related that justifies the exemption?”
All I can say to that is that there is something about blood that motivates people. After I got married and had kids myself, I can honestly say that my own incentives changed, my priorities changed, and I saw myself much more as a “provider” than a mere “earner”. My idea of “what’s mine” evolved very quickly into “what’s ours”.
So there really is a kind of tacit quid-pro-quo here. The government, generally, is interested in a successful, robust economy that has low unemployment, workers who earn enough money to pay taxes, consume goods and services, and spend money to drive the economic engine. One way to do this is to provide incentive to those who would build businesses and help foster this economic activity. If the incentive is to provide a way for these entrepreneurs to realize their own goals – of building something to pass on to their heirs, well, it seems like a reasonable tradeoff. The alternative, as I mentioned in my other post, would be, “Why should I? Why should I work long hours, take big risks, and make sacrifices if the fruits of my labor are just going to have to be liquidated so my kids can pay the taxes?”
So you might see this as being unfair to Bobby, but he has the same chance as Sam and Sally. We all know the thickness of blood, and Bobby should have no illusions. He can start is own business, or, if he is that important to Sam and Sally Inc, he can have a meeting with them and ensure that he be treated right upon their death.
Sometimes it seems as though we are put through ridiculous games just to achieve our ends. For example (and pursuant to your comment about “…the solution would have been to transfer ownership prior to death…”, that’s exactly what we did when my father was in his final illness. He made all of his bank accounts joint accounts with either my sister or me; he re-titled his car so that I was the joint owner, and made a couple of other moves that kept many of his assets out of probate. But why should we have to go through all of that? Many laws seem ridiculous and arbitrary in that sense – that you’re tax-free if you jump through the right hoops, but screwed if you miss one.
“it is like paying taxes on a big lottery win: yeah, it sucks to have to pay some of the money you got by pure luck”
I disagree here, on a lot of levels. The lottery is all cash, for one thing. Taxing an estate is about assets, regardless of whether not they are liquid. When an heir is forced to sell the family home, a farm that has been owned for generations, or liquidate a business just to be able to pay the taxes, that is imposing a true hardship on someone. Don’t forget – the taxes must be paid within one year of the date-of-death, otherwise there is some substantial interest and penalties.
I myself was in the unfortunate position of having to sell my house at the bottom of the market, and it nearly ruined me. I didn’t actually have to sell it – I could have stayed in it – but I was offered a great job opportunity in a different state, and well, that was the right thing to do. The problem was that this was 2010, the market was at the lowest point it had been in decades, and the house was underwater with regard to the mortgage. I couldn’t sell it and satisfy the debt – so I had to foreclose and start completely anew with a seven-year black mark on my credit rating.
But that was my choice. I could have foregone the job opportunity and waited out the market – in fact, the market was back relatively quickly after that. But imagine if i had to sell, and sell within a year, because the IRS was on my back – and not on my back because I had been in any way dishonest or deficient about my taxes – but only because my last surviving parent died?
“But this means that the other people who would have competed with Wegmans were unable to do so in part because they were able to pass on their empire intact. That is, once a family starts winning, they can pass on the win to the disadvantage of their competition.”
Not at all. The Wegmans were successful because they saw a need and filled it, and did so with creativity and innovation, and by taking risks. Anyone with an idea can do the same thing – and if a company like Wegmans is too dominant in the grocery business, well, the opportunity for invention and innovation is virtually unlimited. Even within the context of Wegmans’ success around here, there is still room for Whole Foods, Trader Joe’s, and even Amazon to compete with them.
For the government to limit or even cripple the success of one business so that they can level the playing field for the less successful is grossly immoral, in my view. I would accept that there are some limits to this – but not until you get into the area of some kind of dominant monopoly that is able to control markets and limit choices – but companies like Wegmans or Ace Hardware or Home Depot are hardly in that category. The family did not “start winning”, as one might win the lottery – they achieved success the hard way, and deserve to keep it. In fact, their success should be, and is, inspirational to their competition, and raises the bar to everyone’s benefit. If Wegmans attracts the best employees, for example, because of the way they treat them, then other supermarkets will step up their game to win back the good workers, and everyone wins. If they don’t, well, they’re doomed to failure because all they’ll have are unhappy, underpaid workers who have no stake in the store’s success.
“So, saying we need to protect inheritance to protect charity is to say that we need to protect the system that requires charity in order to protect charity.”
I’m not saying that at all. I’m saying that individuals who accumulate great wealth have a much better capacity to use that wealth for the good of society than the government does. I’m saying that when the government takes wealth through taxes on the basis of “fairness”, they are monumentally inefficient at redistributing that wealth in any way that it can do any good. Our Social Security system is on the verge of bankruptcy, our welfare system is fraught with corruption and fraud; the VA is in a shambles, and politicians are far more likely to allocate funds in ways that will create the best optics and garner them the most votes, rather than actually doing good. The ACA is a prime example of this government inefficiency – the concept behind “everyone gets free healthcare” is a great political slogan, but ultimately the entire system became important primarily to protect Obama’s legacy, and damaged as many individuals and families as it helped.
Meanwhile, for the wealth they are able to keep, the Wegmans, the Golisanos, the Gates’s, and hundreds of others who have managed to keep their wealth out of the reach of the taxman, are able to use that wealth to build university buildings and departments, hospital wings, fund startup businesses, invest in local infrastructure, create youth sports leagues – and much, much, more – without the baggage of politics and bureaucracy.
“if someone has worked hard in creating the value that they will inherit, the obvious solution is ownership transfers and compensation before death.
I’ll take that one step further – the obvious solution is to understand the tax laws, the laws of trusts and gifts, and the strategies and methodologies of protecting wealth from taxes upon transfer, whether during life or after death. It’s not as easy as just “ownership transfer and compensation before death”; that gets taxed too.
So that’s why I say that the truly wealthy people – the Hiltons, the Trumps, the Kardashians – these are the people that America hates, the ones that we really want to see taxed at high rates – and these are the people who will simply never be affected by the inheritance tax. They have lawyers, accountants, brokers who create trusts, shelters, hedges, and overseas havens to protect their wealth.
The easiest way to transfer wealth on a tax-free basis to your heirs is to just get a government job and buy a few million bucks in life insurance.
Or, the government could simply recognize that human beings will go to great lengths to provide for their children, and that Paris Hilton and the Kardashians are really the exception to the rule – and that when one generation (like Robert Wegman) leaves a fortune to his son Danny, Danny will not simply liquidate the company and jet off to dinner in Paris, but will use that wealth in ways the government simply cannot, and improve the lives of many.
Michael LaBossiere says
True, people do put stock on blood; probably some sort of genetic wiring in the brain or social conditioning. However, there is still the question of whether genetic relation is adequate to justify such things as inheritance.