A Case Against The Estate Tax

Professor Robert Michaelsen, an accounting professor at the University of North Texas, earlier this week penned an article in Tax Analysts (subscription required) in which he defended the reestablishment of the federal estate tax.

He starts out the article with the canard that "it is assumed that a progressive tax is desirable".

"With a progressive tax, the tax rate increases as the base increases. In most discussions, however, income is used instead of the base. The argument as to whether a tax should be progressive will never be settled, because it depends on value judgments. In this article, it is assumed that a progressive tax is desirable. This position is based on the diminishing marginal utility of money -- that is, the next dollar of income is more valuable to someone with a lower income because that dollar will often be used to provide the necessities of life. Some conservatives have claimed that taxing dead rich people is immoral. It is even more immoral to tax live poor people, who need the money for food, housing, and other necessities."

Well, we're just getting started and Professor Michaelsen has already lost me. Why should we assume "that a progressive tax is desirable"? One of the lies that the American people have been fed and continue to believe in is that our current tax-and-spend policies can be continued if we can simply stick “the other guy” with the bill. In other words, as long as someone else is forced to pay the tax, then I can keep on benefiting from government services, without paying the freight. Eliminating the “progressive” nature of the tax rules would go a long ways towards eliminating that mindset.

“Opponents of the estate tax argue that it is double taxation: Income is subject to the income tax when it is received and added to a person's wealth and then taxed again when the wealth is taxed by the estate tax. There are two things wrong with this proposition. First, studies show that more than 50 percent of the wealth taxed by the estate tax will never be subject to the income tax. Unrealized appreciation in assets taxed in the estate were not subject to the income tax of the decedent and will not be taxed to the heirs because of the step-up in basis at the time of death.”

Actually, due to the Bush tax cuts in 2001, there will be no estate tax levied in 2010. Assets received by heirs from these estates will receive a “carryover” basis (i.e., not be stepped up to fair market value), meaning that when those same assets are later sold, the heirs will pay tax on the appreciation in these assets. Why does Professor Michaelsen consider that to be some sort of miscarriage of justice?

“Given that the proposed exemption is now $ 7 million per couple, the threat to family businesses should be substantially less. Even if the threat to family businesses were to become substantial, the estate tax could be revised so that it exempts those businesses.”

The tax laws should not be administered by people of a like-mind with Professor Michaelsen, who believe they should somehow be able to “exempt” certain estates and not others. By deigning to decide who gets favorable treatment and who doesn’t, the entire tax system is then set up to be manipulated by special interests seeking special favors. Better to have uniform treatment, rather than arbitrarily deciding who is “in” and who is “out”.

“The wealthy benefit from the social investment in scientific research, subsidized education, infrastructure, stability, the freedom to accumulate great wealth, and other public goods provided by government. The estate tax allows society to recover some of its investment. The elimination of the tax will help change America from a meritocracy to an aristocracy of inherited privilege and wealth.”

All of the favorable attributes listed above by Professor Michaelsen are reasons that we have an income tax, and in no way support an estate tax or another additional tax.

“It is immoral to repeal the estate tax, giving about $ 60 billion a year to heirs while cutting after-school programs, Medicare, Medicaid, food stamps, Third World child vaccinations, prosecution of polluters, and infrastructure maintenance -- to name a few of the cuts proposed by those who favor repeal of the estate tax.”

Professor Michaelsen’s last argument provides us with a false dichotomy, in which he claims that if the nation “gives” (i.e., in non-government-speak, he means “if we allow people to retain their own property”) heirs $60 billion, then we can’t fund certain entitlements and other socialist do-gooder nonsense.

In point of fact, there’s no reason a reasonable allowance for social programs can’t be funded through an income tax or other tax-raising measures undertaken by the government. Suggesting that we have to rely on the estate tax to provide funds for these projects is illogical.

For once I'd like to see big-government types like Professor Michaelsen voluntarily disclose how much additional taxes they have paid, over and above what they are required to pay under today's laws. If having the government take people's money and spend on various social programs is such a great idea, then certainly people like him should be more than willing to go above and beyond what's merely required.