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Although I am normally quite supportive of higher taxation, I've never really felt comfortable with the inheritance tax. I see no reason why the government should tax the money a parent wishes to endow upon their children. That seems to be entirely an internal family and household matter to me which you'd think was none of the governments business.

What arguments are typically offered by those supportive of this taxation technique, both ethically and economically, in order to defend and promote its use?

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    If you already accept taxation in general as ethical then you should recognize that any transfer of wealth between two parties could (or indeed aught to) be taxed. The death of one's parents and inheritance of their assets is an emotionally charged event, but the IRS can't account for feelings. – EldritchWarlord Apr 11 '18 at 20:50
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    Are you talking about th estate tax or inheritance tax? See blog.taxact.com/difference-between-estate-and-inheritance-taxes for the difference. – Barmar Apr 11 '18 at 21:37
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    Are you talking specifically about the US or about inheritance taxes in general? The top 3 answers focus specifically on the US. To me as a non-american, hey seem completely irrelevant to the discussion of inheritance tax as a whole. Then again, these differ so much between countries that any reasoning should be focussed on one country. – DonFusili Apr 12 '18 at 6:31
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    An interesting question would be to ask, what ethical arguments are offered in defense of the concept of inheritance? – Danubian Sailor Apr 14 '18 at 21:22
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    If everything was passed down between families at no cost to them, in a matter of generations a small number of families could own a ridiculously disproportionate amount of property. – Chuck Le Butt Apr 15 '18 at 22:35

16 Answers 16

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What arguments are typically offered by those supportive of this taxation technique, both ethically and economically, in order to defend and promote its use?

Inheritance Taxes As Taxes In Lieu of Income Taxes

Inheritance taxes aren't taxes on dead people who paid taxes on what they earned during life. The dead people are dead. They suffer no harm and receive no benefit from what happens to their wealth after their deaths. An inheritance tax, even when structured as an estate tax, is fundamentally a tax on people who receive inherited wealth upon which they have paid no taxes.

As a general rule, we tax increases in wealth that result from transfers of money and property. At a very basic level, a bonus to an employee of $1,000,000, winning $1,000,000 in the lottery, receiving a gift of $1,000,000 and receiving an inheritance of $1,000,000 are all events with the same economic effect on the recipient and fit within a broad definition of income.

But, in most countries, gifts and inheritances are exempt from taxation as income and a gift or inheritance or estate tax is a tax in lieu of an income tax that is designed to impose less of an administrative burden than treating gifts and inheritances as income would.

Generally speaking, we tax individuals as individuals, not as corporate family units.

Not subjecting gifts and inheritances to income taxation is the exception to the general rule, not imposing taxes on large gifts and inheritances.

Thus, an inheritance tax can be seen as a way of broadening the income tax base, particularly if those taxes would be comparable in magnitude for similar amounts of property transferred. In this view, an inheritance tax supports the standard economic maxim that if you want to raise a certain sum of money, and you have to use distortive taxation, it is best (in terms of efficiency) to use all margins, i.e. to distort everywhere a little instead of only somewhere a lot. Expanding the tax base to include taxation of inheritances, could allow income tax marginal rates to be somewhat lower, and improve efficiency.

Recall also that income and inheritance taxation are fundamentally, in principle, justified as you are paying for the benefits you receive from the government's efforts to create a system of laws and a regulated society. Income and inheritance taxes are ethical to impose because they are paying the taxpayer's fair share of benefit received from living in that society which is orderly/safe enough that you were able to give/gain that wealth by means of income or inheritance at all.

Dumb Money

What Did Heirs Do To Deserve This?

Indeed, ethically, there is less justification for taxing earned income, for which the recipient had to give up something of value in time and effort in order to get paid, than there is for taxing a lottery winner, gift recipient, or inheritance recipient who gave up little or nothing to earn the money received and did absolutely nothing of substance to deserve this wealth. Why not tax undeserved money?

The Economics Of The Leisure Class

Put another way, inherited wealth creates a leisure class that we do not need and who are mere parasites on society that don't have to contribute anything to it.

Of course, sometimes people who inherit wealth do develop noblesse oblige or utilize their leisure to make long term progress for society in science and culture that people forced to think about providing for themselves economically, which is pretty much everyone who does not inherit great wealth, don't have the resources of time or money to do.

Dumb Money Doesn't Manage Wealth Well

This ethical consideration ties into an economic one. Someone who earns a lot of money can generally be trusted to be competent to manage and invest it well, but we have no similar assurances that the recipient of the property will be particularly qualified to manage it in the case of "dumb money" received by lottery or accident of birth.

This doesn't mean that heirs to great fortunes die paupers. But, for example, if Donald Trump had simply invested his inherited wealth in an S&P 500 Index fund instead of actively managing it, he would be more wealthy than he is today.

But, Heirs Might Be Better Than Average Property Managers

On the other hand, the children of wealthy people or objects of the bounty of wealthy people may be more qualified than the average person to manage that wealth, due perhaps to inherited aptitude, or perhaps because they have been groomed for that responsibility during life.

But, this is undermined by the fact that most inherited wealth dissipates in subsequent generations, rather than building up. People who inherit wealth are more likely than people who accumulate wealth themselves to use it for self-indulgence or to lose it with bad investments. Great fortunes rarely last even three or four generations.

Incentives

Economics is all about incentives. The incentives created by an inheritance tax or its absence, are complex and lead to considerations that run both ways.

The Economy Needs An Incentive For People Who Can't Take It With Them

One reason that we don't tax gifts and inheritances at a 100% rate is because the ability to pass on wealth to the next generation gives the people who are currently earning that wealth an incentive to create more wealth and because these very wealthy people would be less economically productive if they couldn't do so.

But, the empirical account here is also mixed.

First people earn money for their own comfort, but in the low tens of millions of dollar range and up, most people who earn great wealth struggle to spend it as fast as they earn it, because at that point many of the things that they purchase (e.g. real estate and art) don't get used up and decline in value after you buy them.

Then, up to a point, people want to leave everything they own to their children.

But, at some point, the vast majority of wealthy people (for whom I've worked as an estate planner for most of my adult life) start to think that enough is enough and no longer want to spoil their children (who are themselves typically past retirement age when they receive inheritances in this day and age). After that point (in reality this starts to kick in around the tens of millions of dollars mark), the very wealthy tend to be more concerned about leaving a legacy for the larger community in the form of university buildings and museums named after them, charitable foundations and other symbols of them having made a difference in the world, and those charitable gifts and inheritances are typically not taxed.

It is certainly not the case empirically that even a 45% gift and inheritance tax rate significantly reduces economic productivity in people who give their wealth to family members. You really need to approach 60%-70% effective rates or so before you start to see much of a significant impact on productivity of donors, and that is only in cases where charitable legacies are not a primary concern.

Nudging The Rich To Do Good Rather Than Merely Doing Well

Normal decent people, even really rich ones, want to benefit both family and friends and a larger society. Normally, in the absence of a nudge from society, they err on the side of giving to family rather than society as their motivating goal to continue producing. But, inheritance taxes provide a nudge that helps the wealth shift their preferences modestly from a basically selfish motivation to a more community oriented motivation, by making charitable gifts and inheritances tax free, while taxing gifts and inheritances to family and friends.

This makes inheritance taxes basically optional. You can give to society and not pay these taxes and have a choice over what cause in society you want to promote. This choice of which cause you want to promote still gives you an incentive to work productively in old age to advance that societal goal. And, the earners unlike their heirs, have shown themselves to be high in merit and so likely to make good and efficient choices about how to improve society with their estates. And, while the causes chosen by wealthy old people to advance may not exactly match societal needs, tax funds can fill the gaps that no one wealthy was interested in donating to at death, so it doesn't really matter all that much exactly what charitable legacies the rich leave, even though they and their heirs can feel good about the charitable legacies that they do leave.

Not An Incentive For Heirs

The flip side of the incentive that is provided for donors is that inheritance provides no incentive whatsoever for heirs to do anything but engage in self-indulgence that has no necessary benefit to the larger society. Huge amounts of resources that could have been used to create incentives are instead squandered away without receiving anything in return. Indeed, the empirical evidence clearly supports the conclusion that people who receive "economic life support" in the form of substantial gifts and inheritance become much less economically productive than comparable individuals who do not receive substantial gifts and inheritances.

Keynesian Considerations

Most of the time, spending money boosts the economy more than sitting on it, and purchasing productive investments creates more value than purchasing unproductive investments. But, people who receive inherited wealth are much more likely to not spend and to not productively invest their inheritances, than the people who would have received that economic benefit had the money been taxed and distributed. So, untaxed inheritances are a drag on the economy.

Inheritors of wealth buy paintings and fancy mansions, not backhoes and factories. They invest in prestige rather than infrastructure.

Their spending reduces the economy's capacity to produce necessities in favor of its capacity to produce luxuries that most people can't afford at all.

Economies of Scale

Historically, one of the important reasons to not only allow inheritances but to specifically favor inheritances to a single heir to an entire fortune was that gifts and inheritances were a major mechanism by which significant amounts of property were concentrated under a single manager, which allowed for economies of scale.

Someone with a 10,000 acre estate can engage in agricultural strategies that benefit from economies of scale in a way that a yeoman with 40 acres and a mule cannot.

But, the importance of the economy of scale justification for inheritance greatly declined when institutions like trusts and corporations made it possible to consolidate management of large quantities of assets without giving all of the benefit of those assets to the person managing them. You can equitably divide shares in a corporation causing the wealth associated with the corporation to be equitably divided, without giving shareholders a meaningful say in anything other than deciding which single CEO will be appointed to run the company when the current CEO is unwilling or unable to act.

Inequality, Meritocracy And Incentives For Everyone Else

Excessive Inequality Encourages Have Nots To Be Unproductive Too

Inheritances meaningfully increase economic inequality between families and between classes of people. The recipients of inheritances often receive great wealth that someone else would be more qualified to manage. And every time you reward someone in the economy for the accident of their birth, you are simultaneously not providing an incentive for someone who has economic merit. (If someone has both very lucky birth and extreme merit, they don't need an inheritance to be wealthy themselves based on merit, so the net benefit to the economy from inheritances received by that person are modest.)

Basically, inheritances push us towards a winner take all economy in which lots of people who would be highly rewarded in a fully meritocratic society are undercompensated and may decline to fully utilize their abilities knowing that fact.

Economic Harms Are Caused By Excessive Rent Seeking Due To Inequality

Winner take all economies divert effort of highly able people from producing economic value that increases the size of the pie for everyone, to "rent seeking" which decides who gets the existing bounty without contributing to the total amount of wealth in the economy.

Rent seeking involves significant expenses that are dead weight loss to society. Frequently rent seeking costs in a conflict by all parties to a conflict can equal or exceed the economic rent that is at stake (e.g. the aggregate litigation costs of parties in a lawsuit over who owns an income producing asset).

In addition, economic rent seeking diverts resources from more productive economic activity.

Now, if you live in a society whose wealth primarily derives from rents and income from the ownership of property, and individual efforts to engage in creating new wealth are fairly insignificant in the overall picture of the society's economy (e.g. Saudi Arabia or Medieval France), having an economy that revolves largely around rent seeking and privileges inherited wealth isn't a serious problem for the society.

But, if economic rents are a pretty small share of the society's total wealth and economic production, then favoring rent seeking behavior in a winner take all economy that ends up that way through the great importance of inherited wealth, at the relative expense of people who have merit and generate new wealth through their own efforts, is a catastrophe.

Dead Weight Losses Arise Due To Gatekeeping Expenses

Another problem with high levels of economic inequality is that lots of resources have to be devoted to gatekeeping and guarding the wealth of the wealthy from those denied wealth, which isn't necessary to nearly the same degree in more egalitarian societies. This expenditure is basically wasted economic capacity.

Inequality Creates A Risk Of Revolutions And Excessive Dissent

And, if inheritance becomes too important relative to earning income, eventually your very political system becomes unstable and the poor meritocrats will revolt and depose the dumb money.

This isn't just an abstract possibility.

We think of the late 1940s to early 1960s as a time of national tranquility and prosperity in the U.S., but the truth is that it was an incredibly turbulent time in terms of domestic labor unrest.

One of the reasons that the U.S. has one of the tamest labor forces and weakest unions in the developed world after unfathomably intense labor actions from the late 1940s to the early 1960s, is that colleges and universities shifted to meritocratic admissions, expanded higher educational capacity, and financed higher education through the GI Bill and public colleges, so that people who didn't have great wealth could advance to their full meritocratic potential.

People who were shut out of the upper middle class until then and became union leaders instead, were coopted into the establishment based upon their abilities and the content of their character. Anti-discrimination laws also cut down these barriers, and taxes in this period for the wealthy were very high indeed, including inheritance taxes.

As wealth inequality limits the ability of talented people with little inherited wealth to succeed again, those people will devote themselves to undermining the system rather than being coopted by it and advancing it.

The "Let Them Eat Cake" Dilemma

Finally, from a primarily ethical perspective, with great wealth comes great responsibility and this maxim applies at a societal level as well as an individual level.

In a society that has vast wealth sufficient to eliminate the suffering and privation of the poor, allowing people who were lucky enough to be born rich to have vast wealth while redistributing none of this unearned societal wealth to those who profoundly need it, is inherently unethical and unjust.

An inheritance tax takes from people who have done nothing to deserve wealth and don't need it, and gives it to people who direly need it or to other worthy societal goals.

Imposing Some Taxes On Unrealized Capital Gains

Another key point to realize in the particular case of the United States is that lots of wealth of most wealthy people takes the form of capital gains, i.e. appreciation in the value of property like real estate and business stock, that has never been subject to any income taxation. Under U.S. tax law, all accrued capital gains in property owned at death are tax free. So, but for an inheritance tax, all of those capital gains (which clearly meet the definition of income) are never taxed at all to anyone. Thus, in the U.S. tax system, an inheritance tax ensures the unrealized capital gains of people who die are taxed at least once. Death is a natural time to do this, because a transfer of the asset must take place anyway at this point.

The ability to totally escape capital gains by holding onto assets also discourages people from selling assets when, but for taxes, that would be the economically efficient choice.

Also, the prospect of inheritance taxation prevents economic resources from being skewed too far towards capital gain producing activities and away from income producing activities. For example, without an inheritance tax, more resources would shift to zero sum real estate investments that rely on appreciation in real estate values and away from retailing and manufacturing and construction sectors that generate current income more than capital gains.

Canada, in contrast, for example, treats death as a deemed sale of capital assets to the inheritors under its income tax, which makes an inheritance tax somewhat less important for revenue protection purposes.

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    "had simply invested his inherited wealth in an S&P 500 Index fund instead of actively managing it, he would be far more wealthy than he is today" see Skeptics for a through debunking of that myth. – JonathanReez Apr 12 '18 at 7:59
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    @JonathanReez The Skeptics entry is not a very meaningful or successful debunking of the claim and has some serious inaccuracies (e.g. regarding taxation). – ohwilleke Apr 12 '18 at 15:22
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    @ohwilleke Politifact agrees too. It's a nice tidbit to use but unfortunately it has little factual ground. – JonathanReez Apr 12 '18 at 15:27
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    I think most of this post is excessive, and not very accurate. You do hit the one true point somewhere in the middle there: If the wealthy parent transferred money to the child while the parent was alive, then that money would be taxed as income. So the same should apply after death. Maybe you should highlight that part. – kingledion Apr 13 '18 at 12:52
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    @kingledion The OP asked for arguments, all the points in here are arguments that can be made, some sources would be a useful addition to the answer, but overall it's an exceptionally detailed and well explained answer. I wish people would be less dismissive of answers that clearly took a long time. – icc97 Apr 15 '18 at 23:37
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There's a number of misconceptions about the estate tax in the US. It's a tax that only affects the very wealthy, it taxes income that can otherwise go untaxed, people with vast amounts of wealth are already able to minimize its impact, and it helps to increase social mobility (reduce income inequality) by preventing the ultra wealthy from hoarding too much wealth. The very wealthy should be willing to repay society for the many benefits they have derived from being born in the U.S.

First, note that the estate tax only applies to the part of an estate worth more than $11.2 million dollars ($22.4 million for married couples). That means that if your estate you're inheriting is worth $22,400,001, then you are taxed 40% of $1... or 40 cents. The logic behind such a tax is that not doing so represents a disproportionately large tax break for the extremely wealthy by potentially allowing assets to grow untaxed.*


*This point apparently needs clarification:

Capital gains taxes are paid on investment profits. A capital gain is earned when an investment is sold for more its cost of purchase. The capital gains tax is applied only to the gain -- the difference between the cost and the selling price. For example, if you paid $10,000 for stock and sold it for $25,000, you would have to pay tax on the $15,000 capital gain. In investment and tax terms, the price paid for an investment is called the cost basis.

When you inherit stock, the cost basis on the shares changes. Instead of using the cost that the former owner -- the decedent -- paid, your cost basis is the share value on the date the former owner died. This "step up" in cost basis can be a tremendous advantage if the shares were purchased at a low price and have increased significantly in value. As an example, the person who left you the shares paid $5,000 for them. On the date of death the stock was worth $50,000. Your cost basis is the $50,000, and the $45,000 gain from the original purchase will not be taxed.

You do not have a taxable capital gain or loss until you sell your inherited shares and have a realized value from which to calculate whether you made a profit. If you sell the stock for more than your stepped-up basis, you have a gain equal to the sale price minus the basis. If you sell it for less than your inherited basis, the result is a capital loss, which you can use as a tax write-off against other investment gains or other income. You report a capital gain or loss on your income tax return for the year the inherited stock was sold.

(Source.)

Taking the example from the link, someone paid $5K for a stock (their cost basis), and it was worth $50K when they died. You inherit this stock at a cost basis of $50K. You do not pay the capital gains tax on the $45K because it is considered to be taxed as part of the estate tax (or because it's considered a tax loophole), and hence why you receive the stock at the increased cost basis. You do not pay capital gains on this stock until you sell it. If you sell it for e.g. $60K, you would pay long-term capital gains tax on $60K - $50K = $10K, which would be e.g. $10K * 20% = $2K tax on the $60K worth of stock you sold. It's also possible to realize losses if say the stock dipped to $40K when you sold it. The original owner would still pay capital gains on this if he/she were alive ($40K - $5K = $35K taxable gains), but you inherited this stock at $50K, and hence can claim a $10K realized loss ($50K - $40K). The disparity comes from the fact that you don't pay capital gains until you sell an asset, but when the original owner dies, he never sold the asset (and hence never paid tax on the gains). Hence, one of the purposes of the estate tax is to tax these potentially unrealized gains-- the difference in cost bases ($45K) would otherwise be unaccounted for and hence untaxed.


Second, it is trivially easy for someone near the threshold to avoid the estate tax, and for those that can't avoid it, there is an entire estate planning industry to minimize its impact. There are a number of tax loopholes to take advantage of, and only approximately 2 in 1000 estates even face the tax. One such loophole is grantor retained annuity trusts (GRATs):

For example, some estates use grantor retained annuity trusts (GRATs) to pass along considerable assets tax-free. The estate owner puts money into a trust designed to repay the estate the initial amount plus interest at a rate set by the Treasury, typically over two years. If the investment — typically stock — rises in value any more than the Treasury rate, the gain goes to an heir tax-free. If the investment doesn’t rise in value, the full amount still goes back to the estate. Such techniques have been described as a “heads I win, tails we tie” bet.

(Source.)

For most families close to the threshold it's easy to escape the tax by gifting money to children, grandchildren, and spouses, deducting large charitable contributions, and protecting some of the assets in trusts.

Opponents of the estate tax like to pretend that it's really about a defense of small farmers, such as when White House chief economic adviser Gary Cohn said, “You have a family farm that’s big enough that it’s going to hit the estate tax, you start paying lawyers, consultants, and accountants to break up your land, and break up your farm” (Source). In reality,

Only roughly 80 small business and small farm estates nationwide will face any estate tax in 2017, according to TPC. TPC’s analysis defined a small-business or small farm estate as one with more than half its value in a farm or business and with the farm or business assets valued at less than $5 million. Furthermore, TPC estimates those roughly 80 estates will owe less than 6 percent of their value in tax, on average.

(Source)

N.B. The source is from 2017, when the estate tax was $5.49 million per individual (instead of $11.2 million), hence the lower values they are studying.

Further, under the current tax system, capital gains tax is due on the appreciation of assets, such as real estate, stock, or an art collection, only when the owner "realizes" the gain (usually by selling the asset). Therefore, the increase in the value of an asset is never subject to income tax if the owner holds on to the asset until death (Source). These unrealized capital gains account for a significant proportion of the assets held by estates — ranging from 32 percent for estates worth between $5 million and $10 million to as much as about 55 percent of the value of estates worth more than $100 million (Source). The estate tax also serves as a means to correct other tax rules that provide massive tax benefits to income from wealth, such as the fact that capital gains are taxed at lower rates than wages and salaries. The top 0.1 percent of taxpayers — those with incomes above $3.1 million — will receive 55.7% percent of the benefit of the preferential capital gains rates in 2017, worth $609,990 apiece (Source).

This means that much of the money that wealthy heirs inherit would never face any taxation were it not for the estate tax.

Finally, a tax on inheritances serves to decrease income inequality, and hopefully improve social mobility. There has been a large increase in wealth concentration at the top: the share of wealth owned by the 0.1% richest families has increased from 7% in 1978 to 22% in 2012 (Source). And much of this wealth is inherited: an examination of the Forbes 400 (list of the 400 richest Americans) in 2012 reveals that while 95% of Americans come from poor to middle-class circumstances, only 35% of those on the Forbes 400 come from similar backgrounds. To borrow a baseball analogy, those born "on first base", to upper-class families with inheritances up to $1 million — make up 22% of the 400. Another 11.5% were born on "second base" — households wealthy enough to run a business big enough to generate inheritances over $1 million. On "third base," with inherited wealth over $50 million, sit 7 percent of America’s 400 richest. Last but not least, the "born on home plate" crowd. These high-rollers, 21.25 percent of the total Forbes list, all inherited enough to "earn" their way into top 400 status (Source). The cutoff for the Forbes 400 list? $1.1 billion dollars.

Further, the top 1% of Americans inherit an average of $4.8 million dollars (Source). This seems to indicate that being born wealthy represents a kind of inertia to stay wealthy-- you can afford better schools, tuition, universities, housing, and have a large network of other wealthy business connections when you come from a rich family. This income inequality thus makes it increasingly difficult to become a "self-made" rich person, and represents a decrease in social mobility.

Hence, an obvious way to reduce inter-generational transfers of wealth is to increase taxes on the inheritances of the super wealthy. This is another reason for the estate tax.

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    The question is about inheritance tax, not estate tax. They're not the same thing. blog.taxact.com/difference-between-estate-and-inheritance-taxes – Barmar Apr 11 '18 at 21:27
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    @Barmar Based on the wording of the question (" I see no reason why the government should tax the money a parent wishes to endow upon their children"), I interpreted his question to be regarding the estate tax, sometimes derogatorily referred to as the "death tax." According to your link, only six states have an inheritance tax. I find it improbable that the OP was asking specifically about a state tax affecting 6/50 states, as opposed to the federal estate tax. – C. Helling Apr 11 '18 at 21:35
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    But the estate tax taxes your estate even if you don't endow it on your children. Anyway, I've asked the OP to clarify. – Barmar Apr 11 '18 at 21:38
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    An often excluded fact is fortunes are made MANY WAYS and virtually without exception, require use of “The Commons.” Infrastructure paid for by taxes. Clean water and air, roads, maintenance, etc. are required for nearly every endeavor in human culture and are often taken for granted. The “Estate Tax” recognizes that freedom to succeed, is indeed, not free. – M.Mat Apr 11 '18 at 22:02
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    Have I missed a US tag somewhere in the question? – sgf Apr 12 '18 at 1:46
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The most important aspect of the Estate tax is that the tax currently only kicks in at $11.2 million, which roughly encompasses only the top 1% of US households, I'll circle back to this.

To understand support of the estate tax we need to go back to the US Declaration of Independence, and the famous words therein:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

The creation of the US was the throwing off of the shackles of British aristocracy. While the track record is far from perfect, egalitarianism and meritocracy are fundamental ideals of the United States. The idea that each person, no matter where they come from or who they are, has the opportunity to come to the US and build their fortune.

However, as shown by the robber barons of the gilded age (and some argue the tech barons of today), there is a point at which concentration of wealth impedes upon egalitarianism and meritocracy. Barriers to market entry and political bribery are not conducive to these ideals. Thus, impeding the extreme concentration of wealth was/is seen as a virtuous endeavor to enshrine US meritocracy.

This is the largest facet of the moral arguments in favor of estate tax. It is not meant to take money out of the pockets of the small business owner passing their business down to their children, it is meant to keep the grandchildren of the Amazon c-suite from becoming american artistocracy who would have the potential to distort both politics and the economy. Not to say that "old money" doesn't exist; with proper investments and tax avoidance a sizeable fortune can be maintained indefinitely.

There is also the argument that those receiving passed-down money did nothing to earn the money, but to many a large incentive of earning money in the first place is so they may pass is along to their predecessors to have a better life than they had. This is where most of the political debate happens currently, whether an estate tax unnecessarily de-incentivizes earning.

The economic perspective is fairly straightforward, the government nets about $20 billion (source is from 2014, this number will likely be far less the coming year as Trump's tax bill more than doubled the exclusion amount from $5.49 million to $11.2 million) from a small amount of people, so opposition by those directly affected is small by comparison to, say, income tax.

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    The question is about inheritance tax, not estate tax. blog.taxact.com/difference-between-estate-and-inheritance-taxes – Barmar Apr 11 '18 at 21:27
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    @Barmar Its true there's an important difference, however from reading the question it looks like the OP had meant to ask about estate tax and not inheritance tax judging by the wording of the question – Gramatik Apr 11 '18 at 21:33
  • I've asked him to clarify. – Barmar Apr 11 '18 at 21:39
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    @Barmar The question doesn't mention any country at all, so it would be entirely fair to understand it as asking about both. – curiousdannii Apr 12 '18 at 1:37
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    Limiting an answer to just the U.S. also doesn't address the broader issues. – ohwilleke Apr 12 '18 at 6:11
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Because It's the most unfair source of wealth.

If you see money as a retribution for your contribution to the society (seems fair), earning money simply because your parents happen to be rich is unfair for other from poor parents.

  • You did not contribute in any way to the creation of this wealth
  • Inheritance perpetuate classes and inequalities, especially considering the growing part of capital vs salary income.
  • It does not entice the younger generation to work because "I'm going to inherit anyway"
  • "It does not entice the younger generation to work because "I'm going to inherit anyway"" This is not really an argument because most of the younger generation won't inherit so much that they won't need to work. – Trilarion Apr 17 '18 at 9:23
  • @Trilarion - ...and also most of them pay no tax. In Germany where you appear to be posting from, the first half a million Euros is tax-free for immediate family. The median net worth of a German household is about a tenth of that. – T.E.D. Apr 17 '18 at 14:06
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Source: Forbes

  • Federal revenue.

    Forbes cited $200 billion dollars in the ten-year period starting in 2013.

  • Reduction in concentration of wealth (and correlated/causated, reduction in income inequality and increase in socioeconomic mobility)

  • The estate tax promotes charitable giving (as a way to reduce taxes).

    As a side note, I personally find this argument ridiculous, but I'm not a tax accountant, so there may be some obscure reason why it does work. Forbes article didn't offer any evidence to back this up - Jeff Lambert's comment linked to CBO report but there seems to be lack of clarity of how to interpret it.

  • It's progressive (and excludes small businesses by having a reasonable floor).

  • It only affects a few individuals (due to floors), and therefore, doesn't cause popular discontent politically.

  • Inheritance rewards individuals who had little to nothing to do with whoever achieved things to earn that wealth. IOW, taxing income is bad because it incentivizes not creating wealth/producing (which is how income is earned), whereas one can argue taxing inheritance doesn't incentivize that.

  • An argument is made that inheritance tax is there to prevent "income" from being taxed.

    This is only partially true - on one hand, most of the inherited wealth consists of wealth that has already been taxed (when it was earned as income). BUT, a substantial portion is, indeed, not taxed - specifically, unrealized capital gains on unsold assets, will not be taxed due to "step-up" loophole (basically, the cost basis of an unsold asset is "stepped up" from the cost basis paid by original purchaser, to mark-to-market cost basis of an asset at the time of inheritance).

    Therefore, for that specific portion of wealth, the estate tax can, indeed, be argued to be done to prevent untaxed gains from existing.

    There are two problems with this approach, worth noting:

    • First, the usual direct or implied narrative is that ALL inherited wealth is untaxed, and thus none of estate tax double taxes things. That is not accurate - everything except the capital gains on unsold assets is already taxed, and is double-taxed by inherited tax

    • Based on tax experts feedback, estate tax is not teh only, and seemingly the worst, way of addressing this issue - other approaches are simply closing the "step-up" loophole by requiring capital tax cost basis be original purchase price and not "at inheritance" price; OR, limiting estate tax to appreciated portion of assets that haven't been taxed with capital gains taxes by time of death of owner.

  • As a counter argument that this creates more economic friction (costs of estate planning etc...), the article assets that it is "only" 10% of revenue from the tax.

    Considering the first bullet, "only" 10% of 200B is 20B. Maybe peanuts by Washington standards but seems like a big amount to be wasted nevertheless.

  • 2
    There is this CBO report from 2004 for the charitable giving argument. It found eliminating the estate tax would decrease charitable giving (as a way of limiting tax liability) by 6 to 12%. – Jeff Lambert Apr 11 '18 at 15:28
  • @JeffLambert - did the CBO account for effect on charitable giving by drastically increasing the amount of money people get to keep? (because not all charitable giving is driven by desire to escape taxes). If that was not taken into account, it's not really a valid way to look at this issue. – user4012 Apr 11 '18 at 15:32
  • @JeffLambert - I didn't read the full report but what I read so far chimes in with my comment. They ONLY examined one side of the coin (reduction due to reduced incentives because of taxes) but not the other (potential increase due to increased money available to people out of which to give). Not only that, but the studies they cite for the increase seem to explicitly be centered around the (miniscule - 10% of total charitable giving) estate bequests and not covering 90% of other giving. – user4012 Apr 11 '18 at 15:41
  • @user4012 The effect you discuss is explicitly considered and discussed at page 5 of the CBO report. If you are going to criticize methodology, you really ought to determine that the methodology flaw that you identify is present. Otherwise you are just engaged in speculation that is heavily colored by mood affiliation. – ohwilleke Apr 15 '18 at 19:59
11

Steel Magnate Andrew Carnegie wrote an entire paper on the subject: The Gospel of Wealth.

He was a firm believer in the overriding value and virtue of hard work, and in the inherent evil of idleness. He basically argued that large inherited wealth is immoral, as it is actively harmful to the people that receive it, and does no good for the people from which it was originally extracted. Thus it is a wealthy person's duty to give away as much of their wealth as possible in productive ways before they die, and if they fail to do that for some reason, it is both right and moral for the government to step in and do it.

Here's how today's Wikipedia entry on the paper describes it:

He preached that ostentatious living and amassing private treasures were wrong. He praised the high British taxes on the estates of dead millionaires, remarking that "By taxing estates heavily at death the State marks its condemnation of the selfish millionaire's1 unworthy life. It is desirable that nations should go much further in this direction."

Carnegie made it clear that the duty of the rich was to live modest lifestyles, and that any surplus of money they had was best suited for re-circulation back into society where it could be used to support the greater good. He shunned aristocratic chains of inheritance and argued that dependents should be supported by their work with major moderation2, with the bulk of excess wealth to be spent on enriching the community. In cases where excess wealth was held until death, he advocated its apprehension by the state on a progressive scale: "Indeed, it is difficult to set bounds to the share of a rich man's estates which should go at his death to the public through the agency of the State, and by all means such taxes should be granted, beginning at nothing upon moderate sums to dependents, and increasing rapidly as the amounts swell, until of the millionaire's hoard, at least the other half comes to the privy coffer of the State."

This used to be essentially the predominant view of inherited wealth in the US. You can still find many wealthy people who subscribe to it, including both of the richest men in the world.

1 - A "millionaire" in 1898 was roughly equivalent to being worth 30 million in 2018.
2 - "moderation" was a favorite word of his. WP's use here is likely referring to this passage: "It will be understood that fortunes are here spoken of, not moderate sums saved by many years of effort, the returns on which are required for the comfortable maintenance and education of families. This is not wealth, but only competence which it should be the aim of all to acquire."

9

Economically it's a rounding error. It's only there as a means to promote a more egalitarian society.

You can think of it as a tax on being born from the right womb. Up to a certain amount you're not taxed at all. After you hit the threshold that society deems large enough that you won't be caring much about your expenses, the excess money gets taxed significantly so as to level the playing field - which is good, one could argue, else wealth would become ever more concentrated in the same families' hands.

Or at least it's supposed to level the playing field... Per C. Heiling's answer, in the US it's only 40% provided you inherit more than $11.2 million dollars (which is much more than most people will earn or spend in their lifetime). For comparison, in France you're taxed 20% starting at 15,932 EUR and up to 45% if your inherit more than 1,805,677 EUR if this page is anything to go by - and the succession tax rates got significantly lowered by the right in the past decade.

9

One note of the ethics of the estate tax:

Man(OP), you mention "I see no reason why the government should tax the money a parent wishes to endow upon their children. That seems to be entirely an internal family and household matter to me which you'd think was none of the governments business."

However, this is explicitly not the case in law. There is also a gift tax, that applies even between family members*. It also has limits, both annually(as of 2018, 15k a year) and over your lifetime(5.6 million, but each parent counts separately for this purpose. The fact that it matches the 11.2 million of the estate tax is not coincidental). Additionally, if you use the lifetime exemption, this erodes your estate tax exemption.

Basically, the guiding principal of tax law is that you should, in general, pay the same amount of tax no matter what you do or how you structure your money, unless you employ a method explicitly approved by Congress to lower your tax burden, for specific inducements (e.g. 401k and Roth IRAs, college savings plans, health care plans, etc.). You can give money now (and over a certain amount it gets taxed), or you can give money when you die, and it gets taxed. In theory, it should be at approximately the same rate.

*Spouses are usually exempt as the marriage is seen legally as single entity, so money is entering the marriage, rather than transferring the money between parties; this merging of money is one reason why divorces are frequently so messy. The rules around marriage were written when it was assumed to be a lifelong arrangement.

  • 1
    As already mentioned, the question is not restricted to the US - these gift tax details are US-specific. The idea itself of a gift tax is not, so this answer might be generalized. But details like "lifetime gift tax exemptions erode estate tax exemptions" are definitely US-specific. – MSalters Apr 12 '18 at 14:09
9

Such long answers, but the OP was not asking for a legal opinion, but an ethical one. :-)

The ethical answer is that the state provides all the infrastructure that allowed that fortune to collect and stay safe for long enough that it can be passed down to heirs. In fact, the very thing called "inheritance" is governed by laws drafted, signed and enforced by that very state.

  • This would have been a reasonable argument. The 40% rate is very stiff though. Why not just leave your country? – user4951 Apr 14 '18 at 14:15
  • 3
    Yes, the rate is discussable, but the question wasn't about the rate being wrong. :-) – Tom Apr 14 '18 at 16:14
  • 1
    @J.Chang The effective rate is not 40%, that's only the marginal rate. For most the effective rate will be 0%. Also, you can probably leave your country, but can you take your wealth with you? – Trilarion Apr 17 '18 at 9:21
  • can I take my wealth with me? If bitcoin yes. – user4951 Apr 17 '18 at 9:41
  • @JChang The notion that bitcoin can ignore domestic tax law is a myth. – ohwilleke Apr 17 '18 at 21:53
9

There are a few factors that come into play here.

The first is that the idea of inherited wealth, privilege and power was the foundation upon which monarchies, feudal and aristocratic were built. It was the opposite of what the Founders envisioned for the United States, a place where, supposedly, everyone was born with a roughly equal opportunity to succeed.

Some founders wanted to eliminate inheritance entirely. In a letter to James Madison, Thomas Jefferson suggested that all property be redistributed every fifty years, because "the earth belongs in usufruct to the living." Madison gently pointed out the plan's impracticality. Benjamin Franklin unsuccessfully pushed for the first Pennsylvania constitution to declare concentrated wealth "a danger to the happiness of mankind."

At the other end of the spectrum, the Constitutional Convention decided to forbid the English practice of allowing the government to seize the entire estate of a person convicted of treason. They reasoned that the property even of citizens who had committed the highest crimes against the nation should not be wholly confiscated.

Origins - Current Events In Historical Perspective: Death, Taxes, and the American Founders

The second is the idea that an inheritance tax prevents someone from passing along their wealth. It doesn't. It takes a bite out of especially large estates, many of which have large portions of that wealth in "unrealized capital gains" - earnings that have not been taxed. If the parents want their children to have their money, there's nothing stopping them from transferring that wealth while alive, subject to gift taxes, of course.

Which brings us to point #3 -

Since there is nothing stopping parents from giving wealth to children while alive, this isn't about whether they can dictate what they do with their money. This is about them wanting to hang onto it, themselves, while alive. However, once they are dead, it's the fact that they are dead that prevents them from transferring their wealth. The dead have no wishes, to desires, no ability to do anything. They can make their post-death wishes known, while alive, but there is no violation of rights for people who are already dead.

Point #4 - The idea that the government or society has done nothing to "earn" the right to a portion of estates in the form of taxes, but children who have done nothing, at all, to earn that money, either, have a "right" to the full proceeds is an inherently contradictory proposition.

  • 1
    Not enough rep for a new reply :( but a comment that I don't think has been really raised: inheritance is often ill-liquid, such as real estate. In extreme cases this could force the heirs to sell, in order to pay the tax. But in some parts of the world, this is the point: feudal or colonial history resulted in vast holdings of land in a few families, and this was choking things like agricultural modernization. So inheritance/estate taxes were effectively a means of land reform. But if it's just a family cottage that's at stake, talk to an estate planner. – CCTO Apr 12 '18 at 17:01
  • 3
    @CCTO - If the inheritance tax were on every dollar, from the first, perhaps, but since, literally, the first millions (in the USA) are exempt, that's not the case. That's actually the basis for a long-standing phony argument where a "family farm" would have to be sold to cover the tax, but when asked for an example, those offering the argument could never find even a single instance of that happening. Even a much less lenient exemption limit than currently exists would still prevent that scenario from playing out. – PoloHoleSet Apr 12 '18 at 17:27
  • @PoloHoleSet In Germany, one very rich man tried to get a law change so that in cases of large amounts of shares inherited, inheritance tax could be paid in shares, and not in cash - which would force the heirs to sell large amounts of shares, which would make the price drop, which would mean they have to sell a larger percentage of shares than the inheritance tax. – gnasher729 Apr 15 '18 at 21:33
7

The general justification of all taxes (not restricted to the US or inheritance tax) is that the government does useful work for the benefit of all citizens, and that has to be paid somehow.

A further justification of specific taxes can be found in the notion that taxes should be paid most by those who are least disadvantaged by the payment. This directly argues for a 100% estate tax, as the dead cannot be disadvantaged in the least.

That's a bit counter-productive, though, as people can already gift the money while still alive. For pragmatic reasons, you'd want to therefore tax gifts as well, and tax inheritances less.

  • Good answer that is short and to the point. Although it kind of neglects the family relation between the deceased and the heir. If I could not pass my wealth to my heirs (at least partly) I might not even want to create it in the first place. That also calls for some kind of balanced approach. – Trilarion Apr 17 '18 at 9:19
6

I cant imagine a practical argument against the estate tax (well maybe the argument that the inheritors tend to spend everything).

Wealth should be a measure of ones success in investing resources to improve productivity. Society wants those who are best at allocating resources to have the most resources at their disposal in order to do just that. In this way having wealthy persons makes a lot of sense and is one of the primary reasons capitalism succeeds. The idea of inheritance though completely spits in the face of this concept. The children of the wealthy get to command vast stockpiles of resources purely because they are born into it? How does that benefit society as a whole?

Any person who will command resource allocation like the wealthy are supposed to do should first need to prove themselves capable of doing so by competing against others. This is the most integral concept of capitalism and easily the best system we have ever come up with for driving economic growth and social stability.

Royal bloodlines never helped anybody but themselves.

  • Re "Wealth should be...": this reads like a school paper OpEd relaying some received opinion. Given which, this answer would be better if it provided the origin or history of the opinions given, for the benefit of those readers who feel less certain about what wealth is or should be... – agc Apr 11 '18 at 20:58
  • While this is indeed the logical argument, it has been falsified. There are several studies (GIYF) that show that the wealthy are not necessarily better at resource allocation and a combination of risk, timing and luck sufficiently explain why some succeed and some fail. Moreover, acquiring wealth and allocating wealth are not necessarily the same skills. There are many examples of people becoming rich and then not knowing what to do with it, as well as of people using inherited wealth well which they most likely would not have been able to acquire. – Tom Apr 17 '18 at 12:50
4

Taxes are due on money coming into a household whether as earned income, unearned income (interest, capital gains, etc.) inheritance or gifts. The fact that inheritance taxes only apply to very large estates is , in my opinion, inequitable but not the subject here. If one agrees that it is reasonable to tax money earned, why would it not be reasonable to tax money received as a windfall? If you worked for your parents and earned money, you would pay tax. So, if you simply get money from your parents, that should be taxed too. Taxes are the way individuals, families and other entities contribute to the running of society, providing social goods like street paving, drinkable water, etc. So, each person contributes (as income tax) in some relationship to their ability to pay. Those inheriting wealth should not be exempt.

2

The purpose of an inheritance tax is to prevent hereditary aristocracies from forming in the country. In the US, inheritance taxes affect less than 1% of households.

2

One ethical argument in defense of the inheritance tax is the fact it is shifting money away from multi-millionaire / billionaire heirs of fortunes and shifting it toward the federal budget, where it is used for, among other things, mitigating starvation, poverty, and homelessness. Currently, in the U.S., the federal government is looking at gutting programs like SNAP, heating assistance programs, Meals On Wheels, Social Security, Medicare, and Medicaid. So it is essentially a trade-off between...
-Fortunate heirs inheriting $900 million instead of $544 million.
-Poor people having food, having their heat turned on, having medicine, not having to work when they're 80 years old, and having the ability to attend college.

Also, wealth inequality has been steadily getting worse in America over time (look at the Gini Index in America by year).
https://www.census.gov/library/visualizations/2015/demo/gini-index-of-money-income-and-equivalence-adjusted-income--1967.html
Social mobility in America is low compared to other developed countries.
https://en.wikipedia.org/wiki/Socioeconomic_mobility_in_the_United_States#Comparisons_with_other_countries
The economy in America is essentially stacked so that the rich get richer; and there are numerous maxims alluding to this fact, such as "the rich get richer," and "it takes money to make money." The Inheritance Tax addresses this directly by mildly mitigating the magnitude of the fortunes that wealthy heirs inherent, and paying for social programs that increase the social mobility of everyone else. In other words, the ethics of the Inheritance Tax translates to whether or not it is ethical for a few Americans to eventually control all of the wealth while everybody else has nothing, which would spell abysmal quality of life for almost all Americans.

-8

Just for the records, I am against inheritance tax and think it's unethical.

However, you want some ethical argument in favor of it.

Here we go.

Think of government as a business and the people as the owner of that business.

So it's "natural" of governments' right to tax people just like it's any business' right to set their fee structure. That's assuming we use common law kind of reasoning. We sort of let people or organization to do what it wish right?

Imagine if some entities have outlived their usefulness. What would you do? You just screw it.

Hard working diligent people have outlived their usefulness. So government just screw them.

Is this ethical? Well. In a sense of government taking care the interest of it's shareholder, it is.

It's only unethical if you don't have choice, if government don't compete, or if the terms are hidden.

If government says from the beginning, you die here as my citizen, and you have more than $100 million dollar due to productivity. Well, I am gonna seize the hell out of your hard earned money when you die so your children have more things to cry about. If government says that for 10-20 years, and you still work hard and don't leave, well. Whose fault is it?

If instead of doing something to protect your wealth, you, on your knee, swear loyalty to the evil regime that would rob you of your justly earned wealth. Is it ethical for that regime to seize your money?

It's as if you had it coming for being too stupid.

Another way to think about it is that inheritance requires government's service. So by inheriting your wealth, you use government's services, courts, laws, etc. to well, inherit your wealth.

The fee is 40%. Stiff. Yea. But it's the fee for it's service.

Another ethical aspect is, the government isn't being furtive about it. If you don't want to pay 40% inheritance tax, you can do many things in advance. You can squander it. You can hire your kids and pay them a gazillion dollars salary. You can buy bitcoin and transfer that to your kids anonymously. Or you can just renounce citizenship and go somewhere else.

You can buy nukes to keep government of your lawn.

You can hire lawyers to set up offshore fund and ensure that your kids control the fund.

You can have 1000 sugar babies and start producing enough children so you can inherit $1 million to each one of them. Not sure if this works.

You can start giving money to your close relatives that share similar genes with you.

The fact that you can go somewhere else gives a bit of legitimacy on taxing you. If you don't like it, why don't you just leave?

Of course, governments do have practical reasons not to do it. I wouldn't work hard if I know I can't inherit my wealth to my offspring. So inheritance tax will keep the best and brightest from working hard.

  • 3
    "You can hire your kids and pay them a gazillion dollars salary. You can buy bitcoin and transfer that to your kids anonymously. Or you can just renounce citizenship and go somewhere else." The first and the third are taxable at similar rates. I can't say that I've ever heard of the possibility that someone can commit tax fraud as a justification for why a tax is ethical. The die broke solution, however, does work although it turns out to be very hard to spend immense amounts of money in ways that actually make you poorer. The main out is that you can give your wealth to charity instead. – ohwilleke Apr 15 '18 at 19:45
  • 1
    Hiring kids is legal. Consult lawyers. Seriously folks. Also, if your assets are all the way in other countries, you think US laws matter? What do you mean by tax fraud? Consult your lawyers. If you use bitcoin that's another issue. You don't have to "own" the bitcoin. You need only to control it. No ownership, no tax. It's like having sex outside marriage. You don't think it's marriage fraud right? – Sharen Eayrs Apr 16 '18 at 5:30
  • Ownership is like marriage. It's government recognizing certain status of property. With bitcoin, you don't need that. – Sharen Eayrs Apr 16 '18 at 5:31
  • Government can't do shit if your bitcoin is gone. Hence, protection of government from bitcoin is meaningless. Tax is protection fee we paid to government to protect us. If we don't need their protection, why are we paying? – Sharen Eayrs Apr 16 '18 at 5:35
  • 4
    Trying to avoid inheritance taxes by buying bitcoin and anonymously transferring it to your children is blatant tax fraud and a felony. – ohwilleke Apr 16 '18 at 5:44

protected by Philipp Apr 12 '18 at 9:11

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