Want Less Death? Raise the Estate Tax.
This post originally appeared in Money Stuff.
As I've said before, I try not to spend too much time analyzing proposed changes to tax law since it is so unlikely that any particular change will ultimately become law. But I cannot resist this report that the House of Representatives' tax bill would eliminate the estate tax while preserving the basis step-up on death. This means that if you buy stuff for $1 million, and it appreciates to $10 million in your lifetime, and then you die, not only do your heirs not have to pay estate taxes on the $10 million, but if they then sell the stuff for $10 million they don't have to pay capital-gains taxes on the appreciation. Any appreciation in the assets' prices during your lifetime goes to your heirs completely tax-free.
This is I have to say sort of an odd tax system on first principles. If you work for a living and make a million dollars, you will be taxed at fairly high rates. (The top rate for ordinary income will remain 39.6 percent.) If you don't need to work, and make your money by investing, you will be taxed at lower rates. (The top rate for capital gains is 20 percent.) But if you inherit your money, you won't be taxed at all.
When we last talked about the estate tax, I criticized Wilbur Ross's complaint that "It's bad enough that you have to die, you shouldn't be fined for doing so":
Of course we should fine people for dying! You tax -- or fine -- behavior that you want to discourage. Taxing a thing reduces the amount of that thing. "The power to tax is the power to destroy." If we are going to get serious about defeating death, the first thing to do is to tax it heavily.
That was a little bit facetious, but only a little bit. For one thing, there is some empirical evidence that the estate tax really does disincentivize death. For another thing, the alternative to taxing death -- a thing we want less of -- is pretty much taxing work -- a thing we want more of -- and so raising taxes on working people in order to lower taxes on dying people seems like an inefficient tradeoff. But also, of course, the estate tax isn't really a tax on dying; it is a tax on inheritance. Encouraging work increases an economy's output; discouraging work decreases it. But encouraging inheritance can't increase output; it's not like there is an untapped supply of rich childless uncles who will be put to productive use if only the estate tax is repealed.
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