Taxing Estates
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?)
I’d prefer for inherited money not to be charged at all, but not because of some aversion to it being taxed twice. By considering transfers of money to the next generation to be a form of income, you enshrine the individual as the essential economic unit, alienating the family from the economic structure of your society.
The rationale for the income tax is that it represents the government’s portion of economic transactions that take place in the economy. Theoretically speaking, it’s the government’s charge for ensuring the social order necessary for an economic function.
I don’t believe that justification holds for transactions that take place within the family. Why not tax the transaction every time a husband or wife gives their spouse some money? Why not tax children’s allowances as income? Why not go to the logical final step, and tax babies for the income equivalent to all the services which their parents give them for free? Because the circulation of money and services within the family isn’t a transaction in the wider economy, and is outside the government’s purview.
The same ought to be said for inheritances. By all means, continue to tax any inherited property at the same rate. But don’t tax the transaction as though it were some regular sort of income, because they aren’t. They’re simply the final service that parents freely perform for their offspring, the closing of a cycle of familial obligation.
— Ethan C. · Apr 16, 12:00 AM · #
“I don’t believe that justification holds for transactions that take place within the family. Why not tax the transaction every time a husband or wife gives their spouse some money? Why not tax children’s allowances as income? Why not go to the logical final step, and tax babies for the income equivalent to all the services which their parents give them for free? Because the circulation of money and services within the family isn’t a transaction in the wider economy, and is outside the government’s purview.”
Monies transfered between living parents and grown children is currently subject to taxation. Will we be lobbying to change the tax treatment in that case as well? And will we also be extending spousal privilege to familial privilege?
It makes know difference to me, I just want to know what you’re proposing.
— Tony Comstock · Apr 16, 12:42 AM · #
I think I would propose not taxing such a thing, though I’m less sure about that than about inheritances. And yes, I think familial privilege ought to be expanded, though I think there’s a special place for strictly spousal privileges. The issue of transfers to adult family members is indeed the thorny point in my analysis. I can understand the justification for that taxation, but I think that the special nature of the family supersedes the claims of the State in such matters.
I may add, an added benefit of ending the taxation of parent-child transactions would be to increase the economic advantage of children to parents, and vice versa.
— Ethan C. · Apr 16, 12:51 AM · #
“I think I would propose not taxing such a thing, though I’m less sure about that than about inheritances.”
Just for the sake of being a sticky beak, what is it that makes you more sure that money received from a dead parent should not be taxed and less sure that money from a living parent should not be taxed? It seems a strange thing to get hung up on.
— Tony Comstock · Apr 16, 12:57 AM · #
One of the main purposes of the estate tax was to prevent dynasties from forming. I don’t know if it worked or not.
I can see ethans point, but I can also see Megan’s point. It is important to note that there is no tax on inheritence if the estate is larger than, I think, 3 million dollars. Not really a pressing issue. Also, you can currently give someone, anyone, $10,000 before someone—I think the recipient—has to pay gift tax. Something like that.
— cw · Apr 16, 01:07 AM · #
I think the dynasty-threats — the Kennedys, Bushes, Gores, etc. — are doing just fine, because they can afford to take the hit. It’s the same reason giant corporations often support more government regulation. They can afford it. Their potential future competitors can’t.
— Ethan C. · Apr 16, 01:12 AM · #
RE: non-taxable gifts
The last time I knew what the number was, it was $10,000. Sadly it’s not something that comes up with any regularity in my life.
— Tony Comstock · Apr 16, 01:18 AM · #
“Just for the sake of being a sticky beak, what is it that makes you more sure that money received from a dead parent should not be taxed and less sure that money from a living parent should not be taxed? It seems a strange thing to get hung up on.”
Because voluntary transfers of wealth between a living parent and an adult descendant seem more similar to the sort of economic transactions that the income tax is meant to apply to. I still think it’s proper to give precedence to the claims of family over the claims of State in such a case, but I will acknowledge that the State can reasonably assert a claim here.
For inheritances, on the other hand, I don’t think there’s any basis for the State to call such a transfer “income”. That’s because inheritance isn’t really an economic transaction between two parties. One of the parties is (so far as this world’s laws are concerned) no longer in existence. It isn’t voluntary; the property of the deceased has to go somewhere.
Since we already recognize that, barring special circumstances, the natural place for that property to go is to the descendants, I don’t see how the State can reasonably consider this to be a taxable economic transaction.
In fact, I wouldn’t call it a transaction at all. Instead, it’s an assumption: the descendants assume the position of the deceased in relation to the property in question. This includes the rights to the property, but also the responsibilities inherent to it, such as property taxes owed. It’s not a transaction, so it’s not income for the inheritor, so it shouldn’t be subject to income tax.
— Ethan C. · Apr 16, 01:43 AM · #
“Because voluntary transfers of wealth between a living parent and an adult descendant seem more similar to the sort of economic transactions that the income tax is meant to apply to. I still think it’s proper to give precedence to the claims of family over the claims of State in such a case, but I will acknowledge that the State can reasonably assert a claim here.”
Do I take from this that you do not have a similar issue with the state making tax claims when the deceased names someone outside of their family as their beneficiary?
— Tony Comstock · Apr 16, 02:00 AM · #
I’m thinking about this some more, and as I’m contemplating the various ways my wife and I entangled financially vs. the way we are not entangle with our children, and especially the way we will be completely unentangled from them when they are grown, the more your proposal seems like it’s trying to carve out a very specific sort of benefit of kinship without the sort of obligations that accompany similar kinship benefits that already exist.
For example, for the purpose of debt, my wife and I are a single entity. If I spend all our money on coke and hookers, she’s no less responsible than I am for figuring out how to keep our mortgage paid. If somehow she can keep the mortgage paid, then when I stroke out from too much blow, she gets to keep the house, with no transfer taxes.
What you seem to be proposing is that “family members” (I’m not sure how widely you’re proposing to define this) be able to partake in a spouse-like postmortem tax free asset transfer, but without having a spouse’s premortum obligations.
At the moment I can’t articulate why this doesn’t smell right to me. I’m certainly in no hurry to see the government get a bigger bite of anyone’s assets. postmortum, or otherwise; and I find the idea of a “fair” tax code laughable. The tax code is the tax code, and we all do the best we can against it’s various incentive, perverse and otherwise.
Yet still, something doesn’t sit right with me about what you are proposing. I’ll sleep on it and maybe come morning I’ll have a better idea of what it is that’s making me itch.
— Tony Comstock · Apr 16, 02:21 AM · #
cw: You mean that there’s no tax on inheritance unless the estate is larger than $3 million, right? (Here are some more detailed numbers.)
Ethan: I see your point, and I think you make it effectively. I think it’s wrong, though, to think that the estate tax enshrines individuals over against families; rather, it’s households that are really treated as the fundamental economic units. (This is why there’s no estate tax for a gift to one’s spouse, for example.) And this seems reasonable enough to me, since for one thing it helps to deal with the potential to extend one’s “family” so widely that it encompasses all sorts of people who really seem to have no entitlement at all to one’s estate. But again, I think your point is fair, and much more reasonable than the “taxing income twice” refrain that I was criticizing.
P.S. The considerations Tony just adduced in favor of the estate tax are pretty compelling, I think, and much more so than the one I gestured at.
— John Schwenkler · Apr 16, 02:25 AM · #
Yes. My stupid computer keeps making all these mistakes.
— cw · Apr 16, 02:50 AM · #
Similar thoughts here: http://stuartbuck.blogspot.com/2003/10/estate-tax.html
— Stuart Buck · Apr 16, 02:57 AM · #
How about resolving it with SSPIM (same-sex polygamous incestuous marriage). By taking “family values” to the ultimate extreme, we can please the farthest-of-the-far right, and the left-est of the far-left, with a devil’s bargain.
Could we get bi-extreme-partisan support for placating the most ridiculous wealthy tax whiners, and the most ridiculous extreme libertines, in one fell swoop? Let everyone define “family” any way they wish, grant them the legal benefits of marriage (including property rights), and be done with the “culture wars.”
Unfortunately, I don’t think even Andrew Sullivan would approve.
— tim a · Apr 16, 03:25 AM · #
Up and halfway through my first cup of coffee, and I don’t have much to add except that I think over all it’s a good think that once we get to be adults our finances are decoupled from our relatives, and can only be re-coupled contractually; by forming marriages, partnerships, corporations; each with well proscribed limits of liability. That would seem to form the rational basis for treating inheritance as income. (Please don’t confuse that with my believing that the tax code is, can be, or even should be rational.)
On a personal note, I have to say I find myself piqued at the traditional heart string “family farm up for auction to pay the taxes after Pa dies” trope that seems to get dragged out when this question comes up.
From where I sit, Junior has the chance to get a working farm for a deep discount. If he doesn’t have the cash on hand, surely someone will be happy to lend him money, collateralized against the farm, sufficient to cover the taxes owed. Same for Dad’s muffler shop, or Poppy’s house on Cape Cod.
I’m sure when my parents die and leave me and my sisters their coastal Californa property, I’ll see thing from a different point of view.
— Tony Comstock · Apr 16, 11:35 AM · #
When my dad died my mom was left in control of our beautiful house in Kailua, Hawaii, 3 blocks from Kailua Beach (where Obama stayed while waiting to be prez). My mom is congenitally incapable of saying no and I’ll skip the ugly details, but there was a disagreement between one family memebers that in the end made everyone (except the bad guys) so tired that we ended up selling the house (to some extent to spite the bad guys). I can’t even think about it without wanting to do some strangling.
So my advice, if you have family memebers who are irrational or evil or short sighted, get everything settled in advance with an array of iron-clad documents. Of course then you can have the fight while the parents are still alive, which adds another layer of psycho-dynamics to the conflict.
— cw · Apr 16, 02:20 PM · #
So my advice, if you have family memebers who are irrational or evil or short sighted, get everything settled in advance with an array of iron-clad documents
Oh, how my life would have changed….
— Freddie · Apr 16, 02:24 PM · #
Adult children aren’t as disentangled from their parents as you say, either in law or in fact:
Junior Ganymede
— Adam Greenwood · Apr 16, 04:27 PM · #
Well one problem with this response is that it is a notoriously bad idea for a farmer to go into debt. But as I’ve said, I have no problem in principle with such a transfer being taxed; my argument is just that it should be taxed according to how much is taken in by each of the inheritors, irrespective of the total size of the estate.
— John Schwenkler · Apr 16, 05:32 PM · #
“Well one problem with this response is that it is a notoriously bad idea for a farmer to go into debt.”
Nothing ventured, nothing gained. Provided Ma & Pa don’t kick the bucket in a car wreck when Junior’s away at college, the army, fishing in the Bering Sea, he should have amble time to prepare for the financial obligations of inheriting the family farm.
But as I’ve said, I have no problem in principle with such a transfer being taxed; my argument is just that it should be taxed according to how much is taken in by each of the inheritors, irrespective of the total size of the estate.
This does not seem unreasonable, and forgive me for having missed it the first time. I don’t see any reason that inheritance income should be taxed more aggressively than other income; but than as I’ve already said, reason is not something I associate with the tax code.
Adam, using the power of the state to enforce relationships and financial obligations between parents and adult children strikes me as a very bad idea. If you’d like to forward the idea that their might be a benefit shaping public in policy so it incentivizes voluntary relationships, I’m willing to listen. But I really don’t want to have to read about a woman who grew up being raped by her alcoholic father having to sue in order not to pay for the hospital bills for his gratuitous end of life care.
— Tony Comstock · Apr 16, 05:49 PM · #
That said, if your main objection is to coercion, then I’d think you’d favor Ethan C.‘s argument. He’s proposing a parent-adult child binding mechanism that doesn’t rely on coercion or obligation.
— Adam Greenwood · Apr 16, 06:11 PM · #
I’m having trouble posting my main comment here, so I’m just linking to it. Hopefully this goes through:
Response to Tony Comstock
— Adam Greenwood · Apr 16, 06:26 PM · #
That said, if your main objection is to coercion, then I’d think you’d favor Ethan C.‘s argument. He’s proposing a parent-adult child binding mechanism that doesn’t rely on coercion or obligation.
I guess what I’m not clear on is what you or Ethan think is being incentivize by not taxing inheritance, or why it wouldn’t be similarly beneficial to provide the same incentives to non-familial beneficiaries, or why it would be less beneficial to provide these incentives premortem.
Without understanding what the incentive/benefit is supposed to be, what it mostly sounds like (to me) is “Because I don’t want to pay taxes.”
Well shit, neither do I, at least not any more than I have to.
So okay, we’re on the same page; neither of us want to more taxes than we have to. Now what?
— Tony Comstock · Apr 16, 06:36 PM · #
Okay, read your response over at your blog. A couple of questions:
Other than not taxing postmortem asset transfer between family members (restricted to direct descendants?) what other legal recognitions of family do you favor? For example, do you favor the concept of grandparent visitation rights?
Are these recognitions/rights severable? Can I divorce my parents? Can they divorce me? Can I sue to prevent my parents from seeing my children? How strong a case do I have to present? What is the threshold, or will we have “no-fault” style divorce?
Are these recognitions/rights exclusive to direct blood descendant relationships? Can the kindly old man who I like to take fishing (and has a bitchen beach front house!) designate me as his legal descendant, even though I’m 43?
And again, what specifically is it you hope to incentivize, other than the rather vague (to me) “strengthening of the family”. I hope I don’t sound glib, but right now it seems as if you’re opening the door to all manner of state intrusion into family affairs, without my understanding what the specific benefits are, other than a lower tax bill.
— Tony Comstock · Apr 16, 06:59 PM · #
Also, and apropos of I’m not sure what, over at Megan McArdle’s blog one of her frequent commenters offered that the reason that they have debtor prison in Dubai is because that works within the clannish structure of their society; ie your brother in law is a fuck up and goes to jail for not paying his bills, so you and the rest of your family steps up and clear his debts because he’s married to your sister, cause that’s the way the roll.
— Tony Comstock · Apr 16, 07:10 PM · #
Those are pretty good objections, Tony.
I think I’d say that what I’m trying to incentivize more than anything else is a recognition of the family as a unified social and economic unit. Thus, property that stays “in the family” would not be subject to taxation as though it were being transacted between independent individuals.
I can imagine other grounds to tax familial changes in property. I most definitely recognize the legitimacy of a tax on property possession. What I object to is taxing inheritance and transfers as income.
I think the tax structure is the government’s second most powerful tool for expressing our nation’s cultural values (the first being criminalization). As it stands, I think that taxing inheritance as income cheapens the phenomenon of inheritance and devalues the bonds of kinship. It treats parents and children as though they were just like any two parties in a contract.
And yes, allowing these bonds to be altered, created, or dissolved at whim, just like a contract, would render them as meaningless as marriage has become under the no-fault divorce regime. That’s not to say they should be legally unassailable, just like marriage was still dissoluble under the old system. But there has to be a compelling reason, occasioned by some violation by one of the parties.
— Ethan C. · Apr 16, 09:51 PM · #
Ethan, please think of what I’ve written, not as objections, but as question worth at least cursory consideration.
More later, including some rather florid prose regarding the right of association as a nations cultural value, but my wife is building us a store for our wholesale business, so I have to go cook dinner. Maybe I’ll lend myself the fish that cw is going to be buying me later this Summer.
— Tony Comstock · Apr 16, 10:25 PM · #
Thanks, Tony. Your questions have been quite constructive! I appreciate your courtesy, and I’ll do my best to return it. Now that being said…:)
“…I think over all it’s a good thing that once we get to be adults our finances are decoupled from our relatives, and can only be re-coupled contractually; by forming marriages, partnerships, corporations; each with well proscribed limits of liability.”
I’m afraid I don’t think that’s a good thing at all. That arrangement imagines that just because one is an adult, one is therefore an autonomous individual with no further natural obligations. An adult is legally free to choose whether or not to recognize any particular duties toward his relatives, to pick and choose as he sees fit.
I’m sympathetic to the argument that it shouldn’t be the State’s business to enforce familial duties, but the trouble is, it already does so in a great many ways. For example, laws pertaining to child abuse and neglect.
If parents fulfill all their duties toward their children in raising and providing for them in childhood, then they should have some expectation of reciprocal duty from their grown children, especially once the parents become incapacitated by age. I don’t see how State enforcement of this sort of duty is any different from the enforcement of parental duties during childhood.
I grant that such a system is vulnerable to abuse, just as current child protection laws can be used to destroy innocent families (and especially innocent fathers during divorces). But that doesn’t mean that the laws enforcing such obligations are prima facie unjust.
— Ethan C. · Apr 16, 10:31 PM · #
Burgers and fries it turned out to be. I’m not a big fan of debt, so the fish will wait for cw’s visit.
Anyway, I was all loaded up to go into a big schpeil about I’m not sure what. Something about my Irish grandparents deciding that they wanted to be Americans and my Eastern European Jewish great grandparents deciding that they wanted to be Americans and about the fundamentally American value of deciding where your allegiances lie. I was fully prepared to have JA call me a rights-humper and not care.
But now you’ve come with this parental rights/obligation thing and I’m not quite sure what to say, plus I’m half way into my second glass of cheap red wine that we poured to dress up our burger and fries dinner.
So some to drunk to drive but not too drunk to type thoughts:
Parent have to take care of their children because parent (more or less) choose to have children.
Parents have wide latitude in how they treat their children. For example I can strike my children in a way that would constitute assault if I did it to anyone else, including my wife.
Even parents can legally abdicate their parental rights/responsibilities.
Similarly, if a parent’s behavior is sufficiently egregious, they can be relieved of their rights/responsibilities.
Children do not choose to be born. I am ultra-reluctant to even contemplate using the power of The State (it’s more fun if you capitalize it!) to compel adult children to have any sort of relationship with their parents.
Laying my own anxieties about The State aside, legalizing adult child/parent relationships, most especially financial obligations seems like a morass. Just look at all the chaos and misery associated with inheritance, even when the deceased wishes for the disposition of their estate are well documented.
What you’ve said about “expectation of reciprocal duty” makes me do a Mr. Spock with my right eyebrow. It is discordant with my experience of being a parent. No doubt when I am old, infirm and indigent my attitude will shift.
Getting back to inheritance, how about we split the baby and make inheritance something like capital gains? We’ll give it a favorable tax treatment, but not a free ride?
— Tony Comstock · Apr 17, 12:25 AM · #
Also, what I’d really like is some help with the “marriage penalty”. By the standards of our zipcode, our household income is relatively modest, and even still, “married filing jointly” costs out a couple Ks every April 15th.
And while we’re on the subject, aren’t you at least a little concerned that this “legal adult family” concept is a step down the road of your tax rate will be (at least partly) determined by what your parents or siblings income is?
Again, I’m not asking to be provocative. I’m asking because you’re suggesting that the definitions of familial fiscal obligation and privilege be extended in a novel way, and these are the sort of questions that pop into my head.
— Tony Comstock · Apr 17, 12:46 AM · #