We tax estates. Estates used to belong to dead people. But we’re not taxing death; we’re recognizing that when someone inherits, they’re experiencing a material gain. There’s no reason that that sort of income should be exempt from tax. So we tax the estate.
Now, in my opinion, we ought to tax the assets as income to the recipients. A $10 million estate divided among 20 grandchildren gets taxed more heavily than a $1 million estate going to one child, even though that child is thereby made much better off than the grandchildren.
Most of Megan’s commenters* are jumping all over her for that first paragraph, but it’s the second one that seems especially important to me. To illustrate why, let me tell you a story.
My wife’s mother comes from a very large family – she’s one of ten, and many of those ten have many children of their own, such that all told my maternal grandparents-in-law have got many dozens of children, children-in-law, grandchildren, and great-grandchildren among whom their estate will be divided when they pass on.
Now some years ago, the paternal half of that family’s leading pair came into a very large amount of money thanks to a lawsuit: it’s a rather long story, but suffice it to say that he owned and ran an gas station for much of his life, and there were many millions of dollars that he and many other independent station-owners gradually came to be owed, a nickel or so at a time, after the multinational corporation under whose name they sold their gasoline and cigarettes switched its company policy to charging the same price for cash and credit but failed – the bastards – to reimburse the stations for the money that this cost them. (For more, see point #1 in Dara’s post on gas station economics.) When justice was served, so was quite a lot of money – money which was, of course, taxed heavily upfront and will, unless it is spent very irresponsibly before then, be taxed quite heavily once again when Grandma and Grandpa Cook’s worldly belongings are passed along to their children, children’s children, in-laws, and the rest.
But apart from a few exceptions, those children and children’s children are not especially well-to-do: many did not go to college, many are in quite a lot of debt, many have children who do plan to go to college, and so on. In short, many of them could use that money quite a lot, and would likely have benefited a great deal from it the station owners had been paid those pennies back when they were originally promised them. They would also, however, be able to benefit a great deal more from that money if their receipt of it on the transfer of the family estate were taxed simply as household income, with attention paid only to the varying financial statuses of its recipients, rather than to the size of the estate as a whole: for there are, to repeat, quite a lot of these children and children’s children, and many of them are not especially well-to-do. And that is why Megan McArdle is right.
Obviously it can seem a bit silly, in a world that contains as much suffering as ours, to complain about the injustice of not allowing the sharing out of what will surely be a multimillion-dollar estate to be taxed at a somewhat lower rate. But an injustice is just what it is, and surely it is not an uncommon one. As I’ve implied before, though, that many also be all the more reason to abandon any hope of remedying it.
* To those commenters, many of whom are joining in some version or another of the refrain that money shouldn’t be taxed twice: All money that changes hands more than once is taxed twice, thrice, and usually many more times after that. The injustice would be if the same transaction involving a given chunk of money were taxed (by the same body) more than once over, which clearly is not what is happening here. (Right?)