59

As I understand it, most capitalists would argue that the reason the rich deserve their wealth is that they have worked for it, and the fact that they have managed to gain such wealth shows that they will do good things with it that will benefit everybody else.
This position seems to be incompatible with widespread opposition to high inheritance taxes, which would help to ensure that people have worked for what they have and therefore have proven that they can use their wealth well as opposed to having inherited their wealth, proving only that they had successful parents.
Is anybody able to explain how these positions can fit together?

25 Answers 25

130
  1. Philosophical reason - why do some people in the government have a greater right to decide what to do with the assets than the person that owned them (through their will, by giving it to heirs/foundations/charities/donating it to the treasury)?
  2. Incentives 1 - most humans seem to value the welfare of their children more than they value their own. By imposing a high inheritance tax you are giving an incentive to these people not to work as hard/smart as they would have or to go live in other countries.
  3. Incentives 2 - by taxing 100% of inheritance, there is no incentive for anyone to leave any assets after they die. That means that instead of investing the wealth (so that the society benefits from it), they would end up consuming the wealth, making society poorer.
  4. Fairness/meritocracy argument - children already inherit the good upbringing from their parents, ethics, some genetic predispositions/talents, looks, experience. Few would argue for neutralizing such advantages by having all children raised by the state, for example. Why is inheriting wealth any different?
  5. Is it not better to aim for a society where every family is wealthy, rather than a society with no wealthy families?

I would recommend watching Milton Friedman's "Free To Choose" series for a deeper discussion of these issues.

  • 70
    I don't understand Incentives 2. How does putting more money into circulation rather than savings make society poorer? I don't agree with some others, but I understand them and this isn't the place for disagreeing. – Onyz Apr 2 at 13:20
  • 40
    @Onyz Think about what happens to real resources. Let's say you have a million dollars. If you invest it, you effectively allow someone to use a million dollars' worth of stuff (human work, raw materials, etc.) in order to produce more stuff (goods, services) that are worth even more to others. They do not benefit personally - none of the real resources are spent on their personal enjoyment. If, however, they spend the money on consumption, they waste society's scarce resources for their personal enjoyment. As an example, imagine that they decide to build a yacht for themselves. – rinspy Apr 2 at 13:33
  • 5
    @Onyz That would require them to use up real resources - human labour, raw materials etc. - that could have been used elsewhere instead. And then, suppose they ride the yacht in a fun way and sink it. Society is now poorer, because real resources were consumed instead of being used productively. Let me know if you have any questions on this. – rinspy Apr 2 at 13:39
  • Comments are not for extended discussion; this conversation has been moved to chat. – Sam I am Apr 4 at 22:56
65

What you seem to be missing is that the foundation of capitalism is voluntary exchange. The rich do not inherently "deserve" their money; a capitalist philosophy rejects the idea that we have the ability to decide who deserves what at some high, societal level. Rather, it emphasizes that individuals should be able to engage in only those economic activities that they wish to. Each individual in a trade decides how much they value what the other participant has (whether that be a good, a service, or money), and when they come to a suitable agreement, they make an exchange. In effect, every individual makes their own decision about what they believe they and the people they trade with "deserve." This maximizes the efficiency of the overall economy by letting individuals choose what benefits them according to their own values.

The idea that rich people are doing good things for others derives from this principle. Why would so many people be engaging in transactions with this person if they did not derive some benefit from doing so? Granted, humans are imperfect decision makers, but capitalists bet on the long game. The actual results will win out sooner or later in the absence of distorting effects on the market. (Compare with how genetic and ant colony AI algorithms find near optimal results to complex problems, if you're familiar with that field.) You have turned this notion on its head, asserting that the goodness of their actions means they intrinsically deserve to have money and property, rather than their money being merely an indicator of the high value other people place on the goods or services the person provides.

If voluntary exchange is foundational to capitalism, then a 100% inheritance tax makes no sense. It is up to the owner of the money and property to decide who is most "deserving" of receiving it upon their death. Government fiat, even when imposed by democratic mechanisms, is the antithesis of voluntary exchange.

Capitalists generally make some allowance for taxes out of necessity, since a government is absolutely required to create an environment where any voluntary exchange is possible (by curbing theft, destruction of property, violence, fraud, etc.). But because voluntary exchange is absolutely crucial, a capitalist will always argue that the government should bring its intervention in the market (read: taxes) to an absolute minimum.

  • Ok, but in the last para, you agree something should be taxed. That doesn't answer why you couldn't have 100% estate tax and 0% income (and/or sales) tax, for instance. – Fizz Apr 2 at 19:52
  • 12
    @Fizz A 100% estate tax effectively makes the government the ultimate controller of all property. The only resources outside its control would be those it paid out for goods or services it wished to purchase, and they would then be reclaimed on the owner's death anyway. That could hardly be called minimal. – jpmc26 Apr 2 at 20:02
  • Fair enough.... assuming people play by the (absurd) rule. A basic tenet of economics/capitalism is that people will act in their own self-interest, bypassing disadvantageous rules whenever they can. In my own answer I explained how this 100% estate tax leads to a lopsided incentives/means balance for evading such a tax... which to crack down on would require even more heavy handed interventions. – Fizz Apr 2 at 20:10
  • 6
    @WhatRoughBeast "Every capitalist aspires to the position of monopoly" No. First, capitalists and entrepreneurs are not the same thing or even subcategories. An entrepreneur may seek to obtain favors and money from the government, for example. Second, not all entrepreneurs wish to eliminate competition. Restaurant owners typically don't want to be the sole provider of prepared meals; they want to specialize in their cuisine. Third, the early 20th century monopolies are a complex and often mischaracterized issue: youtu.be/-VA9VZeox3g, mises.org/library/truth-about-robber-barons – jpmc26 Apr 3 at 20:31
  • 1
    @WayneWerner There is such a thing as an efficiency based monopoly; Standard Oil was an example. But efficiency based monopolies have the distinguishing feature that they are not permanent; they only last as long as the company actually offers the best product for cheaper than other producers can make it. If they try to jack up prices, others can enter the market and out price them. – jpmc26 Apr 4 at 19:13
42

According to Merriam Webster, capitalism is...

an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.

There is nothing in this definition that suggests that the government should take all wealth of every person upon their death.

To me, capitalism doesn't mean "you have to work for what you have". It means that "the government shouldn't take what you have". There are exceptions to this in the USA as laid out in our constitution.

  • 24
    There is nothing in the definition of capitalism that says "the government shouldn't take what you have" and this particularly applies upon death when you no longer have it or anything else in a material sense. – TimothyAWiseman Apr 2 at 16:46
  • 13
    @TimothyAWiseman "There is nothing in the definition of capitalism that says "the government shouldn't take what you have" . Actually, there is. "characterized by private or corporate ownership of capital goods", not government ownership. And private ownership which is terminated by the state is not "ownership" in the usual sense. – WhatRoughBeast Apr 2 at 19:18
  • Comments are not for extended discussion; this conversation has been moved to chat. – Sam I am Apr 4 at 22:55
35

Private property is a core characteristic of capitalism.

Hence, under the capitalist system, it’s my money (and that's all the reason I need).

A country that doesn’t respect ownership is, by default, non-capitalist.

A country that does respect ownership needs to show a compelling excuse for taking away ownership or ignoring it.

The idea of “redistribution of wealth” is not a compelling reason, since it's core is a socialist outlook and it conflicts with the core principle of ownership.

If the country wants money, in a capitalist system, it can work for it, just like everybody else - any other behavior is hypocritical (or concessional to other practical interests / ideas).

A country might deserve to be paid for providing services, such as protecting people’s rights and freedoms - which might be the valid part in the rational for taxes - but a citizen's death is not a valid reason for the country to get paid.

Also, I believe you should re-visit the definition of capitalism. I suspect you’re mixing up the definition with something else.

  • 1
    Can you add some sources? Indeed by your answer, the USA wouldn't be a capitalist country because it has the estate tax, right? Perhaps it would be clearer if you explained what exactly you mean by ownership and when taxes respect ownership and when not. – JJJ Apr 2 at 13:39
  • 9
    @JJJ , the USA is not a purely capitalist country... it practices what is called a "liberal market". – Myst Apr 2 at 13:45
  • "A country might deserve to be paid for providing services", what about someone who doesn't want those services? Can they hire a competitor? If not, then it's still not a compelling reason, since the tax (and the service) are being enforced. – Kazzkiq Apr 4 at 15:24
  • 1
    @Kazzkiq , you’re right. There is an inherent problem with taxes. However, taxes are a valid tool that can solve the issue of “the free rider”. It’s closely related to the semi-contractual idea of “unjust enrichment”. Obviously, services that can be isolated (services from which you could truly opt out and for which competition can exist) should be private services, minimizing the tax burden and keeping the production private (rather than “public”). – Myst Apr 4 at 15:33
  • Indeed, Marx (and his modern intellectual descendants) dispute this notion of ownership: you either agree with it and the rest of capitalism follows logically, or you disagree and the edifice crumbles. – Jared Smith Apr 4 at 21:03
29

The usual argument is that the wealth belongs to the family, and it's their right to pass it on to their children.

There are also significant practical problems with very high inheritance taxes and family businesses; if all of the family members are involved in the business, is it right that the death of one should incur a tax bill that bankrupts the rest of the business?

(The "worked for" argument is usually hypocritical anyway, in that almost all the really big fortunes are from various sorts of property ownership and investment direction rather than actual work. Possible exceptions would be the dotcom companies and things like the TetraPak fortune)

  • 3
    Your second point is very interesting - it does raise a serious practical issue with such a policy if not a foundation for philosophical opposition. I find your first point somewhat difficult, since it doesn't establish where that right comes from. Why should an individual be able to pass wealth on to their children? Doesn't that seriously damage the idea of a meritocracy that many capitalists seem to be aiming for? – CoedRhyfelwr Apr 2 at 11:19
  • 3
    @CoedRhyfelwr Capitalism is an economic theory. Meritocracy has no place in an economic theory. The business of an economic theory is to effectively use scarce resources. "People get what they worked for" is a value judgement, not capitalism. Many people may agree, but it's still out of the scope of the theory. Capitalism does make it more likely that people get what they're worth, but that's just a consequence of the principle of private property, not part of the theory. This confusion is why "liberal" now means (usually a limited form) of socialism - people confuse the effects with methods. – Luaan Apr 3 at 17:16
  • @CoedRhyfelwr I'll counter your offer: where does the right of the state to ever attempt a 100% estate tax come from? If we are to accept for a moment that a family does not automatically have the authority to make the decisions about their wealth, and we must contemplate whether they have such a right and where it comes from; then so too must we accept that the state does not automatically have the right to take all of our family property, and whether the state has any such right or authority and where it might come from. – Aaron Apr 3 at 18:33
  • But that is surely a feudalistic argument, not a capitalistic one. – Stian Yttervik Apr 3 at 20:22
21

An good example for the issues are generational enterprise as foresting. Owning a forest s likely owning a large are of land. However (depending on kind of tree, expected sizes etc.) it can easily take 80-100 yeas to grow trees from planting till felling those trees. If there is a 100% tax there is little incentive for the first generation to plant any new trees (except maybe storm protection or similar) as profits from it won't fall to successors but the land, most likely, has to be sold of to pay the taxes.

Another related example is farming. On many farms it is typical that family members join in a last in harvest season while receiving little to no payment ("one day, this will be yours, my son!") and to-be-heirs join in early to take more responsibility over time - again not receiving a proper salary, which probably couldn't even payed.

In industry these arrangements probably exist less than previously, but if we look just at capital being able to inherit the wealth is a driver for growth. If you have to give away everything there is less reason to keep the investment working.

  • 5
    You can actually expand this to any sort of long-term business investment. Since anyone can die at any time with no warning, long-term investment is very risky if it all goes away upon death. Privately-owned businesses would be heavily focused on the short term to minimize risk, but that's not good if you want businesses to thrive and grow over the long term. – bta Apr 2 at 22:29
  • The land the trees grows on is valued based on future production. By not maintaining the land they're lowering its value. It would be better for them to sell it off at some point and consume the money somehow. – JollyJoker Apr 3 at 7:23
  • 2
    I've never seen a neoclassical / libertarian argument in favour of the possibility to own land. Land ownership can never be the fruits of anybody's labour (even a Dutch polder is just changing wet land into dry land). We can acquire it from a previous owner, but the first owner can only get it through what libertarians would call force; if one rejects that first transaction, then, by extension, all subsequent transactions and thus all land property is illegitimate. – gerrit Apr 3 at 7:57
  • 1
    You can have multigenerational private forest management without private property of land, by the government putting out a lease for the management of that forest. The market value to transfer this lease to another party will depend on how sustainably the forest has been managed. – gerrit Apr 3 at 7:59
  • @gerrit I seldom applaud arguments but yours I will make an exception for. Well done, sir. – Stian Yttervik Apr 3 at 20:24
18

In a capitalist society you are free to do what you want with your money. This includes giving it to your children.

  • 7
    But that's clearly not totally true, there are lots of things you can't do with your money (at least in every capitalist society that has ever existed). What makes giving money to your children different from spending it on, say, slaves or child porn, or assassins? – divibisan Apr 2 at 17:04
  • 9
    @divibisan Not able to spend money on those other things has nothing to do with being free to use your money how you want and everything to do with protecting the lives of those people. It is not a financial matter but rather a criminal matter, and that comparison is like comparing apples to oranges... no, that's too close... it's like comparing apples to orange crayons. In times/places when people do not detest the things you list, people can spend money on them, even legally, but (at least in every society of every type that has ever existed) giving to your children has never been taboo. – Aaron Apr 2 at 23:05
  • 6
    @divibisan Or giving it to an organization with an established monopoly on violence so they can use their monopoly on violence to make sure that other people will spread their wealth around instead of giving it to their children :) – immibis Apr 2 at 23:30
  • I suppose I need to clarify: my main issue with this question is that it's lacking in depth and really should be a comment. I was trying to suggest an area the answerer might want to expand on to make it a full answer. – divibisan Apr 3 at 14:39
  • 1
    @StianYttervik That's what a will is for. – immibis Apr 4 at 0:17
12

While I think pjc50s answer is good, there is one more important thing:

If a person owns a company, what does a 100% tax on that mean? It effectively means the company will become a state owned company (in a closed system, otherwise there is also the possible to sell it by the state to some emergent asian country). In about one generation time all companies will have become state companies (either your own state or some other state).

  • 4
    It could be auctioned to investors with the proceeds going to the state. The state wants the money, not the company. – immibis Apr 2 at 23:33
  • 4
    @immibis êstimated market value of all companies in the US is 30 trillion. If you say they will be turned over all in the next 30 years you need 1 trillion investors (bidders) money per year. Who can afford this? Blackrock is currently invested with 6 trillion, so they might be able to expand. Then foreign funds. So in 30 year the US economy belongs to blackrock and asian funds. Who owns blackrock after this massive expansion: who knows, especially US citizins who own blackrock shares will also loose them under the 100 Tax regime. – lalala Apr 3 at 6:55
  • 1
    It's an auction - if people can't afford the price you think something will fetch at auction, then your thought is wrong and the price will be lower. If it reduces company size and longevity that might be good for the economy anyway - startups are much more likely to use fresh new ideas and much less likely to use regulation to stifle competition. – immibis Apr 4 at 0:19
  • 1
    @immibis we agree on this one. The fact is you are (forcefully) putting up your countries economy for sale. Supply increase, prices might drop. So other countries can purchase your economy for even less money. This wont reduce neither company size nor longevity. – lalala Apr 4 at 8:12
  • That person would still have to give up the company when they died. – immibis Apr 4 at 20:36
11

You seem to have a poor understanding of Capitalism and it's political counterpart of Liberalism (Classic sense, not Modern usage). The idea of Capitalism is the private ownership of the means of production (as opposed to Socialism, which holds that the means of production is collectively owned). In effect, if I am selling furniture, I either made the furniture myself from scratched (I planted the seeds that grew the tree that I chopped down for the wood that I cut into the pieces of the chair that I sell to the person who wants a chair, who determines the price by the quality of my doing all of that.).

As laid out, that's an exhausting list of tasks, even when we consider that I am cutting the list down from a lot of other things that are added together. I don't want to do all that... well, If I sell a chair for a certain price, I can pay someone to grow and chop trees... and I can make the wood and then cut the wood into chairs parts and then sell the chairs in my store. But then I could pay someone to cut the wood (he pays the tree guy) and then I shape the wood into chair parts and assemble them and sell them in the store. And each step I can reduce to another guy to make my chair and give him something in return for that service (and If I'm Swedish, my store doesn't sell chairs, it sells chair parts that my customer assembles). Money (aka the Capital in Capitalism) makes the exchange standardized so I don't have to convert from three Chickens and an Egg to Cows (a Barter system).

The other side, from the consumer, is I can choose which chair I want to buy. Say the fancy throne made of swords costs 100x the capital of the simple kitchen table chair, which is double the cost of the Swedish kitchen chair parts which I can assemble... I'm free to choose... do I want to eat my breakfast in a chair I put together, a pre-assembled chair, or a throne made from swords? And how much capital do I want to spend on those things. (And the prices reflect my own labor... in the former, I'm paying less cause I do not have to pay the person who put the chair together, because it's my own labor. The double price for the assembled chair reflects this extra step of making a chair that I just don't want to do. The 100x price of the Throne made of Swords is because I want people to see me eating Cheerios while seated in it and think I am some awesome kingly figure who clawed my way to the top and can afford such a luxury.).

So with that crash course out of the way, suppose I am a rich old dying fart and want to give all of my capital to something that could use it, because I'm not going to use any of it soon... the principle here is that, as it is my money, I can decide what I value spending it on. Sure, I can give it to charities (Charities that I like, mind you... or I can give it to the government to do something with it (but they take a bite out of my profits from all my chairs), or I can give it to my family, who I know and love and for whom I've done a life time of hard work to be the Nelson Rockefeller of Seating arrangements. As a consumer or investor, I'm allowed to value all of these things and make my own choice as to who I give my stuff too. If my kid is a brat, there's no rule that says I don't have to give him my stuff. But if my kid is someone whom I trust with decisions as to how to manage my affairs, would it be any different if I gave him all my money and chair stores and stuff in exchange that he cares for me in the Twilight Years? And when I finally kick the bucket, since we made a private transaction, he should be allowed to keep the stuff with as minimum interference as possible. After all, I made a fair trade with him, so he did in fact earn it, because I valued something in our relationship that was worthy of the exchange of capital. So what if the government doesn't value my family's love as much as I do, Liberalism and Capitalism don't give a damn about what the government thinks of my private exchanges.

Not everyone who is rich is a souless cretin... for some, a life time of love from their spouse and children for their entire fortune is an exchange they would make willingly and feel like they come out ahead. I speak from experience that, if offered the choice between a parent and their inheritance, I'd rather have the parent.

  • I can give it to the government to do something with it, are you sure? In The Netherlands it's not possible to simply donate money to the government; I guess this is because of anti-bribery legislation. – gerrit Apr 3 at 7:51
  • 1
    @gerrit: In the United States, it's entirely possible to donate funds to the treasury in excess of lawfully owed taxes. Here's a link: fiscal.treasury.gov/public/gifts-to-government.html – hszmv Apr 3 at 15:35
11

I am a capitalist. A libertarian capitalist.

The point of having wealth is to decide who will benefit from that wealth.

What is the point of having wealth if the state rather than the earners decide where the wealth go?

I earned my wealth. I decided that it'll go to my children.

If a state prohibits that from me, I will move to another state that allows it. It's as simple as that.

And those states will run out of productive people.

Too much socialism, in general, is stupid.

Actually precisely because any rich people can simply buy bitcoin and give money to their son secretly, prohibition of inheritance tax is stupid.

In the end, like socialism and income taxes, it'll just make investor and productive elements go toward the country. The country will become another Venezuela.

The countries in the world are like shops. The tax is revenue. The voters are the owners. And the productive people and taxpayers are like the customers.

If you prohibit inheritance tax, why would productive taxpayers want to come or stay in your country? The country will be like shops with no customer for being stupid.

  • Why would you bother to oppose it, instead of simply going to a state that doesn't have it, should it pass in your state? – immibis Apr 2 at 23:32
  • Good question. I will add the answer. – user4951 Apr 3 at 19:53
10

As I understand it, most capitalists would argue that the reason the rich deserve their wealth is that they have worked for it,

One of the reasons, correct.

and the fact that they have managed to gain such wealth shows that they will do good things with it that will benefit everybody else.

Nope, I've never heard that argument.

which would help to ensure that people have worked for what they have

well, yes

and therefore have proven that they can use their wealth well

as said, no one argues that.

What you are getting mixed up with is the position that not letting people have keep their wealth is a disincentive to wealth creation

This is actually something most* people agree with, with the arguments being at which point the effect kicks in, and how strongly**.

*communists aside

** right-wing libertarians aside, as they tend to believe it starts kicking in straight away.

  • I think your point is good overall, but I have definitely heard plenty of people on the right oppose taxes (or any action that would have the effect of redistributing wealth) by arguing that "wealth creators" (ie the rich) are able to make better use of their money than the government or the poor. So I don't think the "no one argues that" point holds up, though your main point on "disincentive to wealth creation" is a good one. – divibisan Apr 2 at 17:08
  • 1
    @divibisan that tends to be an argument about who runs things, not who gets the money, although they are of course somewhat related. Also note that the argument there tends to be that government is inefficient vs market forces are efficient. – Orangesandlemons Apr 2 at 18:23
  • By libertarians, do you mean anarcho-capitalists or anarcho-socialists? – gerrit Apr 3 at 7:55
  • @gerrit I intended to mean the right-wing variety. I'm unsure of the leftwing variety's opinion on the matter. – Orangesandlemons Apr 3 at 8:12
  • @Orangesandlemons Then I'm confused, why would the right-wing variety not agree with not letting people keep their wealth is a disincentive to wealth creation? – gerrit Apr 3 at 8:16
6

Beside the other answers: tricking a high inheritance tax is very common already in countries where it is high. The most common trick is that you give it to your children yet in life.

If you also forbid (or tax highly) the donation of wealth to the children, then people will seel it for $1 to a mediator, who sells it for $1 to the children. You can forbid (or tax highly) also this, then they will look for yet more complex bypasses.

Fact is that the laws of the free market always reach their goals, the only question is, through how big pain.

For example, if something is good, but it is forbidden, then its price will grow, and the people wanting it, will still be able to get it on this higher price.

Another example: forbidding drugs causes their price to grow. For the higher price, more people will ready to risk prison to ship the so wanted drugs to the drug users. The result is that drugs can be accessed in practically all societies, they are only much more costly as their production would be, and they still remain available for the ones who are ready to pay it.

The same is for the inheritance. Fact is that most people wants to leave their wealth to their children after their death, that you can't forbid. If you try to forbid, they will try search for bypasses. And the ones capable and wanting to pay the price, will get what they want. Only the price is the question.

The actual traffic of most goods is regulated by the Marshall-cross:

enter image description here

As the price of a good grows, so will be more people ready to create (supply, ship, construct, produce) it. And so will the count of the people lesser, who want to get it on that price. The result is that the price of anything will automatically set itself to the point, where the supply and the demand is the same.

The only exceptions are the so-named Giffen goods. Giffen goods are the things what people need to buy on any price, because they have no other choice. For example, it doesn't matter how costly is to buy the basic food, or water, people will buy it on any price, because they have no other choice.

On the other side, also luxuries behave similarly. Simply because the people wanting it, are wanting them because they are costly. For example, if the price of the diamond would decrease to its tenth, it would become lesser wanted, and although more people could buy diamond jewelry, their actual traffic wouldn't grow so much.

To forbid inheritance, tax is not enough. You would need to make it to a Giffen good. More clearly: you would need to do things which are worser than tax. For example, you should harshly maybe physically punish the children. Doing these can't happen even in North Korea (they are doing nearly its exact opposite).

The result would be a society from where people are escaping to the lesser hostile ones, despite the general injust (the luck of having wealthy parents is clearly not merit).

  • "As the price of a good grows, so will be more people ready to create" - you're reading this backwards. The less people are ready to create something, the more the price grows. If less people aren't ready to create (assuming demand is the same) the price won't grow in the first place. – immibis Apr 4 at 0:22
  • @immibis It is a function. It defines only a connection, and not a causility. Human language can be misinterpreted, but the formulas not. Btw, in my opinion, the direction of the causility is what I said, because the money motivates people to create things, but it does not matter about the post. – Gray Sheep Apr 5 at 20:14
  • The money motivates people to create things (increasing supply) but this doesn't happen until the demand has already gone up or the supply has already gone down. You will notice that increasing price motivates less people to consume things (decreases demand). According to usual economic theory, making drugs illegal and therefore increasing the price does decrease the amount of drugs traded. – immibis Apr 5 at 22:30
  • Yes, it decreases the drug, but does not eliminate it. Drug is still available practically everywhere, it is just costly. Having a 100% inheritance tax would decrease the amount of the inherited wealth, but it would not decrease it to zero. Note also, for the addicts, drug is also a Giffen good. This is why it can be handled effectively only with measures worser than the loss of any money (capital punishment). – Gray Sheep Apr 7 at 2:55
5

The reason there's no conflict is that your first claim is about who gets to make a decision and your second claim is about what that decision should be. These are really independent issues.

As I understand it, most capitalists would argue that the reason the rich deserve their wealth is that they have worked for it, and the fact that they have managed to gain such wealth shows that they will do good things with it that will benefit everybody else.

I don't know that I agree with that, but I'll assume it for the sake of argument.

This position seems to be incompatible with widespread opposition to high inheritance taxes, which would help to ensure that people have worked for what they have and therefore have proven that they can use their wealth well as opposed to having inherited their wealth, proving only that they had successful parents.

There's no incompatibility. You just disagreed with your original argument. If we agree that wealthy people make good decisions about what to do with their money because they earned it, then if they choose to leave it to their children, that must be a good decision. If it were not a good decision, they would have done something else with it. After all, they're not required to give it to their children. They can spend it, give it to charity, or do whatever they want with it.

If we assume that rich people deserve their wealth because they have worked for it and that they will make better decisions than strangers, then they should have the widest possibility of options open to them and strangers should not foreclose their options.

Is anybody able to explain how these positions can fit together?

There's no inconsistency. High inheritance taxes restrict the ways wealthy people can use their money. If wealthy people are the best judges of what they should do with their own money, society shouldn't be putting a heavy finger on the scale.

If you're right that it's bad to leave money to your children and we assume wealthy people are good judges of what to do with their money, you should be able to rationally convince them not to leave money to their children. But you didn't earn their money, so how can you know better than they do how it should be spent?

What you could argue is that if most capitalists make the argument you say they make then there shouldn't be all that much inheriting going on. And, not that this proves the assumption correct, but it does seem that inheritances have been decreasing with more wealthy people spending their money while they live or leaving money to charitable causes. There's also been a dramatic increase in people leaving money to their children unequally, which suggests that they are not just automatically leaving the money to their children because that's what people do, they're thinking through the decision and taking into account some judgment of merit or maybe spite, but something anyway.

  • 1
    Perhaps wealthy people are good at using their money but dead people are not? The person does cease to be wealthy if dead. – Vality Apr 3 at 6:23
  • @Vality - Re: "The person does cease to be wealthy if dead" - Scientifically based unbiased Citation needed:) – Dunk Apr 3 at 16:47
  • @Vality Sure, but the decision of what to do is made while they're alive and still wealthy. In any event, agreeing with you would just mean the second claim doesn't follow from the first, which nobody is arguing. (I'm just arguing they're not inconsistent. The OP argues they're necessarily inconsistent.) – David Schwartz Apr 4 at 2:32
5

Putting on my tinfoil hat for a second...

The more the state benefits from inheritance, the more incentive a cash-strapped state has to see that rich old citizens have unfortunate accidents.

4

One additional answer not directly covered here is that the value of any given asset is set at the moment of its sale. In circumstances where a large amount of any given asset is offered for sale at the same time, the value of that asset drops - particularly when the seller has no control over the time at which to offer the asset for sale.

This means that a 100% inheritance tax can be incredibly destructive of the value of assets held by parties with no relationship to the dead person. If you were a shareholder in Microsoft in the year 2000, and a 100% inheritance tax were in place and Bill Gates got hit by a bus, the probate court would have to offer all of Bill Gates' Microsoft shares for sale simultaneously in order to liquidate them and pay the tax. That would create huge windfall opportunities for some participants in the market for Microsoft shares, and huge damages for others, based on your position in the market at the arbitrary moment of Bill Gates' death.

Liquidation of fixed and negotiable assets is the part of the inheritance tax process that redistributionists never seem to conceptualize well.

  • 2
    One could argue that this might even discourage people from investing in companies in the first place if a single investor owns a significant share of the company. – bta Apr 2 at 22:38
4

There are practical evasion reasons: 100% estate tax can be evaded by fake selling to someone alive, who then fake sells to your children, for a small fee. A small or medium inheritance tax make the risk involved in this scheme not worthwhile. (You're relying on the good faith of the intermediary, who could just keep the stuff.) But anything approaching 100% estate tax turns this into a lottery worth playing. Assuming nobody has any (charitable) friends to partake in such schemes is a big leap of (negative) faith in human nature. And I'm not the first to say this

Duke University law professor Richard Schmalbeck surveys a wide range of estate tax avoidance techniques and shows that although it is possible to avoid a significant amount of estate taxes, doing so typically requires people to give up control of their assets, which they are not inclined to do.

Unless they have nothing to lose: 100% estate tax case and assets you don't really need (e.g. a 2nd hose) but your children would need. You can already guess this 100% estate tax is going to be hardest hitting for the less well off.

Even in countries with fairly low inheritance taxes there are sometimes complex anti-evasion provisions, such as the "pre-owned assets" (POA) rule in the UK that says that if you sell/give something but continue to use it, you must pay tax for it. This works pretty well for the (single) home of the "average Joe". But imagine some billionaire who has 20 yachts and 5,000 pieces of jewelry. It would be really difficult for the tax man to prove the guy really keeps using all of them.

The only way to surely prevent this fake selling scheme is 100% sales tax on some "book value" of every item! How well would that work?

TLDR: the higher the taxes, the more there is an incentive for people to evade them. And the rich will be (much) better at this. So the 100% estate tax will mostly hit the "average Joe" in full. Which is actually the case for the current estate taxes as well.

  • It might not even need to be indirect. I'd sell my kids their inheritance for $1 with the proviso that i get to use it while i'm alive. You can't really outlaw such agreements without jumping down a pretty deep rabbit hole. – cHao Apr 2 at 18:24
  • 1
    @cHao: the tax man has thought of that fgibson.co.uk/factsheets/capital-taxes/… – Fizz Apr 2 at 18:26
  • 2
    What you describe seems like a rather blatant form of tax evasion and given the 'proper' jury makeup, would likely be simple to prove. A better evasion strategy is one that is done rampantly today. Start a charitable foundation, move all your assets into the foundation, hire your heirs to run the foundation with generous salaries, actually give only a small portion of the charitable foundation's money towards 'real' charitable activities. The heirs can then leave their fortunes to the same charitable foundation. Sustained and never-ending multi-generational wealth controlled by the family. – Dunk Apr 3 at 16:58
  • @Dunk: well, I did not want to get to complex instruments, as too keep my arguments accessible. But you are correct that proving the former and present possession of the exact same item in a family would not be hard... unless you had to do it for every inhabitant (and every item). The resources spent on that process would add up. – Fizz Apr 3 at 17:01
  • It would presumably be possible to enforce this by making gifts (or selling below market value, which is essentially a gift) illegal. Although illegal gift giving could still happen it would become much much more difficult. – Vality Apr 3 at 22:30
4

The reason, as I suspect you guessed, is that the rich know the system is far from being any sort of theoretical pure meritocracy, and that they would like their children to benefit from their excellent ticket in the Vagina Lottery (also known as the Sperm Lottery). Indeed, many of the rich today got off to a great start in the upper or upper-middle class. We just pretend that their outcome is a result of their own hard work, brilliant investing, or whatever.

  • 2
    We just pretend, who does? Do you in the USA? – gerrit Apr 3 at 7:25
  • Even 'rich' kids need to do the work and make the smart decisions that it takes to create a successful outcome. While there are certainly exceptions, the only pretending is by those who see others who are more successful than they are and attribute the reason to their having wealthy parents rather than the hard work it took to achieve that success. – Dunk Apr 3 at 21:31
  • No, @Dunk, the truth is that trust fund kids don't need to work and don't need to make particularly smart decisions. They'll be fine, unless they develop major drug habits. – Andrew Lazarus Apr 4 at 4:01
  • @AndrewLazarus - Really??? How many trust-fund kids are you intimately familiar with? Despite my coming from an exceptionally poor family, I did attend a top-tier school which had a lot of students that you would describe as trust-fund kids. I can tell you with certainty that overwhelmingly those kids didn't have trust funds, weren't given 'fun' money, including several who had to work 20 - 30 hour per week jobs to cover 'their share' of tuition and had extremely high demands and expectations placed on them from their parents which caused them a lot of stress. – Dunk Apr 4 at 15:52
  • ... I remember it being quite striking how not being a hard worker and wasting time wasn't even an option to many of them. If they had some free time, they couldn't even stop themselves from finding a way to be productive. Of course, this was before the genX-ers, so likely things have changed. – Dunk Apr 4 at 15:54
3

The answers would depend on which political, ideological or factual background you're coming from (e.g. pure communists would have a complete different look on this matter than classic liberals, etc.).

But the main logical reason, as seen from a "capitalist" (or any non-statist) is:

  • The inheritance was accumulated by its owner. Therefore, it's their property by right.
  • Since it's their property, they can do with it whatever they please.
  • If it's their choice that their property gets passed to someone in their absence, and since they have authority of what they're passing by (their property), it's their right to do so.
  • Anyone, by any means, who try to overcome this decision with a different resolution from the owner's desire would be considered as an attacker to the owner's own property.

To put it in simple terms:

You own a bike. As you grow older you eventually notice you make no use of it anymore, so you decide to pass it to your younger sister who is learning to ride a bike and would love one of her own. You drive by your parent's house and as you're taking the bike to the front door, a kid step in the middle of the way and argues that he thinks he deserves that bike because someone somewhere said it should be like that. The kid also says you have no voice and shouldn't even resist since it's not in your hands anymore to decide what you do with your bike or not. Don't want to give the whole bike? Ok, then at least you will have to give both tires, so that's a little more fair to everyone, right?

Do you think it's actually right to do so?

  • 1
    The simple terms completely ignore the fact that taxation is (1) essential to pay for common services, and (2) predictable by the rule of law. Therefore, your bike analogy is incorrect. – gerrit Apr 3 at 7:42
  • 1
    @gerrit no it isn't. The analogy embraces your exact "fact": That someone, somewhere said every property owner should pay some taxes to some organization (government). Should it be legit just because someone voted for it someday? Well, even voting system has it's flaws. Centuries ago people also voted in favor of slavery, so should we accept that just because it was voted and written in a piece of paper? – Kazzkiq Apr 4 at 14:45
  • In a democracy, separation of powers, human rights, and other aspects guaranteed in the constitution, are protected beyond the power of a simple majority to take away (cf. ochlocracy). Your bike analogy would work for a tyrant who taxes only to enrich himself without serving the common good. The reason that society accepts taxes is because the overwhelming majority of people accept that common goods need to be paid for. The remaining discussion is only one of how much taxes for how much services society accepts, and society's answer is culturally dependent, and different in Sweden than in USA. – gerrit Apr 4 at 15:33
  • (Incidentally, your post also exhibits the deeply depressing American misconception that cycling is somehow something for children) – gerrit Apr 4 at 15:33
3

I would just like to add that not only the rich deserve the wealth they worked for, it is actually anybody who worked for what they got.

You don't have to be rich to be hit by inheritance tax, real estate tax or any other spurious tax on your worked-for assets. In fact, if you are rich, you probably have better possibilities to evade or mitigate many of those.

It is when you are merely affluent, that it can hit harder.

As for why should people be able to leave their assets to their children, apart from other answers already describing reasons, I would just like to note that this behaviour appears to me to have deep evolutionary roots. We have evolved so that we by and large wish to improve the lives of our children and to give them as much opportunity to pass our genetic line on. So we want to give them every edge in their generation. Capitalism - and most former systems of civilization - give us opportunity to invest our current work into our bloodline's future not only via upbringing, but also with material goods.

I can't be sure if this argument is biologically correct, but it looks to me as there is plenty in it, since even the socialist systems - both present and past - have plenty of rich and poor people in the broadest sense of rich being those who had way more resources.

It is just that in such places as USSR, in order to be rich, you had to be part of the feudal system of the Communist party. And most children of high ranking CP members were semi automatically included in the next generation of the ruling elite.This process was mitigated in early days by shooting the elite regularly, but as soon as the mass executions stopped, you can see generations of ruling elite trying to give their children a leg up by means fair and foul.

The only difference with capitalism is that in capitalism this kind of nepotism is generally not needed, since plenty of people have recourse of investing effort into the children's future by simpler - and reasonably more fair- means.

  • most children of high ranking CP members were semi automatically included in the next generation of the ruling elite, is that actually true? Looking at biographies of selected high ranking CP members seems to suggest many made their party career from a pretty basic origin. – gerrit Apr 3 at 7:27
  • 1
    @gerrit: There's probably some selection bias involved. High-ranking party members would be more likely to have kids who also toe the party line. (Totalitarianism being what it is, counter-revolutionary kids would stunt the parents' careers.) – cHao Apr 3 at 13:35
  • @gerrit Generations at the top changed slowly since purges; consider ages of CP gen.secs, and the period of their rule. Brezhnev, for exmaple, was born in 1906, so of course he wasn't a child of CP elite. A known example is actually his children; I don't know if you deduce it from Wikipedia pages, but for me it is quite clear that they were protected and enjoyed much higher status than "ordinary" children. I don't know if there is any research into this, but from anecdotal evidence of my childhood, there was plenty of children who were treated with better marks due to their parents' status. – Gnudiff Apr 18 at 7:52
  • 1
    @gerrit And after children became adults, nepotism was rife. – Gnudiff Apr 18 at 7:53
1

This is effectively the same as questioning whether I should be forbidden to give something to my own child. Think of money as a house, a car, my shop for him to resume the business, or whatever.

  • 2
    Of course, that's what the question is asking about. But, to play devils advocate, from a purely capitalist perspective, shouldn't that shop be owned by whoever "the market" deems best, not just the child of the previous owner? This answer assumes that one considers inheritance to be sacred, but if they accepted that premise then they wouldn't be asking this kind of question. Can you back up this assumption? – divibisan Apr 2 at 17:14
  • It's not sacred, it's just that if you reformulate the sentence like this, you can see it does not make sense as a general moral principle. Imagine I cannot give my car to my son even I am to old to drive, or I cannot let him run my shop.. If I cannot do it with my own child, I guess it is implicit not possible with my wife, my friends and the like, otherwise there would be the possibility to cheat with a couple of passing intermediates and also it would not be very coherent.. – Whimusical Apr 2 at 17:25
  • So a society where state does not allow you to give anything to anyone for free. That makes the scene even more capitalistic. Obviously one has to be totally authoritative to forbid this, in my opinion it is not even debatable. Perhaps if he means "in case the inheritors are very wealthy" that could be more debatable, or even, "in case the inheritance is done post mortem" (since if it is implicit, once again, everybody would change the property title when alive, so it is useless) – Whimusical Apr 2 at 17:25
  • 1
    @divibisan A 100% inheritance tax wouldn't be the market deciding who gets things, it would be the government doing so. There's no law requiring anyone to leave things their your children -- they only do that if they, the property owners, thinks that's best. People doing what they think is best with what's theirs is the market. – David Schwartz Apr 2 at 18:20
  • 1
    Obviously, the idea that humans act rationally according to optimise what capitalist economic models think they should optimise, is a myth. The family bond is deep, evolutionary, and inherently irrational. – gerrit Apr 3 at 7:46
1

In a practical sense, a 100% inheritance tax would just be part of a full employment act for accountants and estate planners.

The wealthy would just transfer their wealth, before they died.

You could then try to prevent them from doing that, with all sorts of unintended consequences, starting with the wealthy simply moving to a country that didn't have such laws... plenty of them around.

1

This position seems to be incompatible with widespread opposition to high inheritance taxes, which would help to ensure that people have worked for what they have and therefore have proven that they can use their wealth well as opposed to having inherited their wealth, proving only that they had successful parents.

You have slipped in a premise here that needs to be challenged. The receipts from inheritance taxes are not earmarked for people who have worked for what they have; on the contrary, in those nations which tax inheritances at a high rate, the primary justification is that the money can then be used to fund benefits for people who do not have to work in order to receive them. (As one philosopher put it, "What is your pass-key to the moral elite? Your lack of value.")

Nor are these high taxes the best way to prevent the proliferation of worthless heirs of industrious parents, or even a particularly good way. As other people have pointed out, getting around these taxes is only a matter of finding the right legal help. Many of our biggest fortunes got around inheritance taxes this way, and the inherited wealth is now often seen in the hands of heirs who support high inheritance taxes.


Addendum

This may have been discussed in other answers, but capitalism as a whole is not ends-focused, but instead is means-focused. Its primary stipulations are that the government not allow or impose coercive transfers of property, and not try to be a player in the markets that arise. The question of who winds up with the money is something that capitalist theory regards as immaterial. The moral justification of capitalism rests not on the claim that it brings about some desired result, but that it is the only system that rejects coercion as an acceptable means of acquiring wealth.

Therefore, capitalism is not concerned with whether someone who has a lot of money "worked for it", so long as he didn't get it by robbery or as a gift made possible by robbery.

0

As many answers have pointed out, you seem to be confused about capitalism. However, even looking past that you have a paradox in your question. Pointing it out might help you realize the answer yourself...

Remember this simple axiom to start with: Capitalism allows for private control of wealth.

You mentioned something about people being good and wanting that wealth to have a positive impact. Capitalism does not require any such thing, but let's just go with what you said for a moment anyway.

Hypothetically: Everyone wants what is best and agrees that this can happen the best if the state takes 100% of a deceased rich person's wealth instead of letting the rich person control that wealth. Remember, Capitalism allows for private control of wealth. But you are talking about a system where the state controls the wealth, so what you are suggesting is plain and simply not capitalism.

The question could be reworded as "Would capitalism work better if it did not allow for private control of wealth?" Or, to take it even further, "Would capitalism work better if it were not capitalism?"

An analogy: "Do you think a cat would make a good dog?" Doesn't make sense.

Of course, an economic policy is not forced to adhere 100% to one single theory. It can have some capitalist tendencies, some socialist tendencies, some anarchic tendencies, and whatever else you want. So you could propose a system that is "mostly capitalist, except that I want a 100% estate confiscation" (let's call it what it is, since 100% is not a tax), and that would be fine. But that 100% estate confiscation would not be capitalist in any way and would instead be exactly the opposite.

0

I can entertain the overall sentiment, but this is a bizarre premise:

...which would help to ensure that people have worked for what they have and therefore have proven that they can use their wealth well as opposed to having inherited their wealth, proving only that they had successful parents.

I am a capitalist. I love my children. My capitalist actions (generating wealth in a (partially) free market via voluntary exchanges of labor and capital) are done in the interest of my children. I will give my children my wealth when I die, not because I am confused about my feelings about capitalism, but because my lineage is improved (made wealthier) by my work in the present. Granted, I can wrap the distribution of the wealth in conditions like "get married", "graduate college", etc. but those are familial positions, totally divorced from my positions on economic practices.

Your premise seems to imply that being a capitalist also means that you believe that you will take your wealth with you when you die.

0

Inheritance has been around forever, probably longer than mankind — even animal offspring will probably inhabit burrows which once belonged to the parents. Hell, even a lactic acid bacteria would not hesitate to inhabit the same fold in the skin which its parent cell did.

It corresponds on a very fundamental level to how we feel towards our children: We equip them in any way we can in order to help them be successful.1

This principle is so deeply ingrained that it is not bound to any particular social order. Even societies who are much less squeamish about taxation allow private inheritance, like the People's Republic of China. Monarchies did, obviously: "L'État, c'est moi" was Louis' XIV succinct way of describing the scope of his possessions which were then inherited to his great-grandson (because the precursors in the line of succession had died).

An attempt to abolish inheritance would be short-lived because it runs against our values; its proponents would swiftly be removed from office. That said, passing on wealth beyond what is needed for a jump start is considered unjust from a different angle (perpetuating wealth and influence, creating dynasties in a purported meritocracy). This is the reason why a taxation of inheritance, e.g. an estate tax, is tolerated. But the conflict with what we consider a natural right — to keep what is ours and to do with it what we want, in particular give it to our children — leads to constant resistance against and scrutiny of such laws. This articel by the Brookings Institution discusses this conflict.


1 That some parents think not spoiling their offspring is the best equipment notwithstanding ;-).

protected by Sam I am Apr 3 at 5:57

Thank you for your interest in this question. Because it has attracted low-quality or spam answers that had to be removed, posting an answer now requires 10 reputation on this site (the association bonus does not count).

Would you like to answer one of these unanswered questions instead?

Not the answer you're looking for? Browse other questions tagged or ask your own question.