Uneasy Rhetoric

There’s an interesting thread going on over at Kevin Drum’s Political Animal about the estate tax. It started out as a post on Matthew Yglesias’ site where he suggests, but doesn’t say outright, that spoiled rich kids (one commenter on Drum’s post suggested the Hilton sisters) are one of the best arguments for an estate tax.

As someone who grew up on the other side of the tracks, that argument has a kind of “damn straight, word up, hell yeah” emotional appeal. But I know better. I know that such an argument merely plays into the hands of conservatives who think that liberals hate the rich and don’t want anyone to become rich. The comments to Drum’s post play that out, with one person saying “if you want to see proof that the left is animated by nothing more than jealousy and spite, this is it.”

I don’t think that my strongly held belief that American public policy should discourage the hording of wealth comes from either jealously or spite. Like every American, I would like to be rich. I would like to be able to afford the finer things, have a nice home, and provide for any future children I may have. What I don’t want, and what the estate tax actively discourages, is to die being worth a fortune. I would much rather be able to see my money going to work via my children, charitable donations, gifts, and travel while I’m still alive. I can’t see my money work for me if I’m already dead.

Without an estate tax, wealth passes from generation to generation and only trickles out into the wider economy. With even a modest estate tax, the government creates an incentive for the wealthy to pass on their wealth while they are still alive, to charity or to their children. If anything, the estate tax is a benefit to wealthy children because it might encourage their parents to show some lovin’ long before they die.

The estate tax is also a way for the government to recoup income that has not been taxed. In the Drum comments, someone said they thought the estate tax was unfair because it taxed income that had already been taxed in some way. That isn’t completely true. When you talk about wealth in the millions of dollars, you are, in generally, no longer talking about earned income. Much of the wealth the estate tax would cover would be the transfer of capital gains.

Let’s say I buy 100 shares of XYZ for $10/share in 2000. When I die in 2060 (I should be so lucky) those ten shares are worth $1,000 each. That’s a capital gain of $990 per share, or $990,000 total. I didn’t sell those shares during my lifetime, so I pass them on to my child. At that point, the capital gains clock starts over. When my child sells the shares and files his taxes, he will treat them as though he had purchased them for $1,000/share. The government never got to see any tax income on that wealth.

And yes, I do believe that the United States government would deserve a share of that pie. Why? Because of everything the government does, every day, from trade regulations, to public safety, to diplomatic agreements, to helping keep the price of gas ungodly low,* that makes it possible for people like Bill Gates to make exorbitant amounts of money in the first place.

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*Yes, the government does help keep the price of gas low in two very specific ways. First, gas taxes in the United States are modest, and we tend to get a large bang for the buck; our road system is pretty good. Second, long-standing public policy (regulation) that makes it illegal for corporations within the same industry to collude helps keep the price of gas low. Don’t believe me? Let them do it for just one year. Americans need gasoline, and the price would have to go a lot higher than the current $2.40/gallon before you’d see a real reduction in consumption. If the oil companies could legally collude, there would be no reason for them not to raise prices.