How the Death Tax Hurts the Poor

Here is my piece on the death tax in this morning’s Wall Street Journal (subscription probably required); viewers of this video will find the arguments eerily familiar.

Here’s the one passage the WSJ didn’t have room for; one day our children will look back in wonder on an age when the length of an argument was constrained by anything so archaic it could be measured in square inches:

I know you’ve heard it said that spending is good for the economy. That might be true during a recession, if you subscribe to a broadly Keynesian view of the world. But the death tax encourages overspending year in and year out, which is not a good thing no matter what your point of view.

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25 Responses to “How the Death Tax Hurts the Poor”


  1. 1 1 Paul G

    To access the article without subscription, search news.google.com for “landsburg” and follow the link.

  2. 2 2 Kevin Donoghue

    Thanks, Paul G. I’m sure there are good arguments for replacing a ‘death tax’ (what a weird term) with a graduated consumption tax. But this piece doesn’t really make the case. We need a model if the discussion is to get anywhere. The piece urges us to read the work of Chamley and Judd. So I go looking and the first thing I discover is that they assumed immortal agents. Okay, maybe that’s not as daft as it sounds. Perhaps we are to think of the DNA as immortal; they say that Genghis Khan’s DNA is still very much with us. So the dynasty lives forever, paying taxes on the wealth it transfers from one period to the next. But how then do we distinguish a ‘death tax’ from ordinary capital taxation?

    It’s an interesting topic and I’d like to hear more, but I won’t be out campaigning for the graduated consumption tax anytime soon.

  3. 3 3 Steve Landsburg

    Kevin Donoghue: The work of Chamley and Judd is 25 years old; in the interim there have been hundreds of papers extending and generalizing their results. You don’t need immortal agents. See, for example, the paper of Atkeson, Chari and Kehoe: http://www.landsburg.com/chari.pdf .

  4. 4 4 Kevin Donoghue

    @Steve Landsburg,
    The agents in that overlapping generations model leave no bequests. They remind me of the old cartoon where the lawyer is reading the will to the expectant relatives: “being of sound mind, I spent it all.” You can apply any tax rate you like, it won’t change anything.

  5. 5 5 Steve Landsburg

    Kevin Donogue:

    As is usually the case in economics, no one model is instructive enough to guide real world policies. What our models do is hone our intuitions. There is a strong intuitive argument behind the Chamley/Judd prescription, and the various models tell us that this intuitive argument is rigorously valid in a great variety of artificial environments, which gives us confidence in believiing that the argument has significant content and can reasonably be applied to the real world.

    The fundamental point is that all taxes distort the labor/leisure decision, whereas capital taxes also distort intertemporal consumption (and intertemporal labor supply) decisions, and that fewer distortions are better than more. When I first heard this argument, I thought of some objections that seemed very significant to me. I’ve learned from studying models that my objections were just plain wrong.

  6. 6 6 Kevin Donoghue

    @Steve Landsburg,
    I’m aware that there are strong arguments against capital taxation in general, including taxes on interest income for example. It’s not clear to me that there’s anything particularly bad about taxing bequests, as opposed to dividends or capital gains. Yet ‘death taxes’ do seem to arouse particular opposition in the US; I’ve never even seen that term used on my side of the pond.

    But then Americans don’t seem too enthusiastic about VAT either, though that’s a tax on consumption. There’s an argument that VAT is tolerated in Europe, despite being hard on low-income groups, because it pays for a social safety-net which would otherwise be unaffordable. Political economy involves some odd tradeoffs.

  7. 7 7 Steve Landsburg

    Kevin Donoguye: The arguments against estate taxes are identical to the arguments against taxes on dividends and interest. The op-ed and the video talk stress the estate tax because that’s what I was asked to address. Note the remark near the end of the olumn, though, pointing out that the same arguments apply to capital taxation more generally.

    I’d be enormously happier with a VAT than with almost any tax on capital income.

  8. 8 8 Kevin Donoghue

    @Steve Landsburg,
    Fair enough, I didn’t really register that remark near the end of the column. I don’t have anything to contribute on taxing capital versus taxing labour or consumption, so I’ll bow out of the discussion. I’m just reading the paper linked below which looks quite quite interesting as a counterpoint to your view. Obviously I’m not pretending to know who is right.

    http://finance.wharton.upenn.edu/~abel/pdf_files_papers/capitalincometax_4a.pdf

  9. 9 9 Cos

    You lose some credibility by calling the inheritance tax “the death tax”. It’s a term invented to make it seem like a bad thing, and you think it’s a bad thing, but you like to hold yourself above tacky emotional appeals of that sort. You pretend to be about reason and facts. This is not a tax on “death”, it’s a tax on inheritance. Estate tax is a reasonable term too, though IMO less clear. But “death tax” is tacky propoganda.

    That aside, you also miss the point in an overwhelming way.

    The main purpose of the inheritance tax is the idea that vast accumulations of inherited wealth over generations create an aristocracy and this is deeply corrosive to democracy. You can’t oppose the death tax on the basis of its costs without even mentioning its purported benefit: reducing the amount of inherited aristocracy we have in the US.

    You could argue that an inheritance tax on its own is insufficient to achieve that, because the wealthy have found workarounds, but the answer to that would be to find some other strategies to address those. You could argue that with some other strategy in place the inheritance tax would be unnecessary to achieve this end, but I’d really like to see that other strategy first.

    You could argue that vast accumulations of inherited wealth and a multigenerational aristocracy is not actually that big a problem, and the extra consumption you say the inheritance tax leads to is actually a more significant problem. At least that’d be the beginnings of an honest argument.

    P.S. Given how many theories fly around about what sort of behaviors changes in tax policy should incentivize, that turn out to be completely different from what we actually see in reality, I’d also like to see some real evidence of how much extra consumption the inheritance tax stimulates, as opposed to, say, extra donations to charitable foundations or university endowments or the like, vs. how much it leaves behavior unchanged because people don’t always know when they’re gonna die and want to leave their wealth intact in case they keep living a while longer, or have huge medical expenses in their last few months.

  10. 10 10 Steve Landsburg

    Cos: If you want to prevent vast accumulations of inherited wealth, you can do it with a highly graduated tax on labor and/or consumption. You can extract any amount of wealth you want from wealthy dynasties without taxing capital (including estates).

  11. 11 11 math_geek

    Prof. Landsburgs arguments assume that people save in part to pass on the investments to their children (or others), an assumption supported by the fact that people do pass on some of their savings to their children. However, it is not clear to me that all that is passed on to children is saved by the parents for that purpose. No-one knows ahead of time when they are going to die (or else life insurance companies would be in big trouble) and thus when the decision to save is made, it must be made without knowledge of how long the saver will live to spend their savings. Thus it is quite probable that a significant portion of what is passed on to children was money that would have been spent had the deceased lived longer. In that case the effect of an estate tax on saving is less than what Prof. Landsburg predicts, because you’re only taxing one of the benefits of saving rather than the saving itself. This suggests an estate tax is considerably less harmful than a capital gains tax or similar tax on actual investment.

  12. 12 12 Ken B

    What about wealth that accrues from human capital? That capital dies with the investor whether taxed or not. Estate taxes for movie stars and Nobel prize winners?

  13. 13 13 William Tarasen

    Dear Mr. Landsburg,

    You previously commented: “I’d be enormously happier with a VAT than with almost any tax on capital income.”

    I don’t believe you thought that one through. Most people use the term VAT and sales taxes interchangably. To me there is a distinct difference. Adding value implies just that. And adding values normally requires work i.e. jobs. Taxing jobs is exactly the last thing we would want to do.

    A sales tax on the other hand taxes consumption and is applied equally to all consumers of products taxed on a percentage basis.

    Hence a national sales tax would do a lot less harm than a VAT tax.

    Regards

    Bill

  14. 14 14 Steve Landsburg

    William Tarasen: I don’t think you thought that one through. The economic incidence of a tax is independent of its legal incidence.

  15. 15 15 Keshav Srinivasan

    Steve, Greg Mankiw claims in this blog post that economic incidence is no longer independence of legal incidence if you have sticky wages:

    http://gregmankiw.blogspot.com/2010/12/tax-deal.html

    Does that have any implications about the relative merits of a VAT or a retail sales tax?

  16. 16 16 David Wallin

    @mathgeek You make an argument that sounds plausible, and certainly one might be able to test it (or has). However, as implemented in the US, we’re talking about only applying the tax to multimillion dollar estates. I would speculate those individuals take seriously the transfer to future generations (those I know do).

  17. 17 17 Harold

    I think zero rate for capital is not ideal, partly because of the impossibility to separate capital from earned income. Also partly because of the immortal agents etc, which seem to make it not certain that a zero rate is ideal. However, I am now convinced that capital income should not be taxed the same as wages.

    Whilst people do want to pass on money to their heirs, I suspect the incentives are diluted compared to tax on their own income or wealth. Inheritance tax probably bothers the rich less than the same level of consumption tax. Therefore, the rich will put less effort into political lobbying to remove the tax. Politically, therefore, an inheritance tax is able to acheive desirable redistributive goals. A consumption tax, whilst it could in theory give the same benefits, cannot actually do so in practice.
    This latter part of the argument does not contadict what SL says – it should still be better to educate everyone to accept the consumption tax. However, until Steves campaign has born sufficient fruit, we are probably left with need for some level of inheritance tax.

  18. 18 18 William Tarasen

    Dear Mr. Landsburg,

    While the legal and economic incidence may be independant, cost to market is not. Adding a VAT for building in America would place a huge cost burden for doing so. Having worked on and made decisions relative to plant locations, a 20% VAT such as Europe’s would kill more American jobs than anything I could name (OK, sans the EPA and green energy).

    Regards

    Bill

  19. 19 19 Steve Landsburg

    William tarason:

    Apparently you don’t know what “incidence” means.

  20. 20 20 William Tarasen

    Dear Mr. Landsburg,

    I don’t want to get into sematic quibbles nor bringing in to the discussion things which I didn’t originally bring up. All I said in English was that a VAT penalizes American production of value. That’s how I assess a company is by looking at Economic Value Added (EVA).

    In today’s global economy the economics of production and cost to market are very driving forces. WalMart made a fortune by dealing directly with manufacturing thereby cutting out wholesalers, inefficient warehousing, etc. On the other hand going off shore adds shipping, inventory response, and time value of money issues.

    But having been involved many times in determining where value is added I can tell you it will almost always go to the low cost production site. Adding a tax penalty for adding value in one location will certainly impact a site selection. I know factories move for economic reasons because I have seen me do it.

    Regards

    Bill

  21. 21 21 Harold

    William Tarasen: Nobody claims that a “new” tax would not have some costs, but are you sure that 20% VAT would kill more jobs than the equivalent tax elswhere? After all, that 20% would lower taxes elsewhere.

  22. 22 22 William Tarasen

    Dear Harold,

    I was only comparing the VAT with a general Federal sales tax and expressing an opinion that the VAT would unfairly target domestic production of value, something that in this current economic environment we should be encouraging. Both taxes would be regressive with regard to consumption.

    We use tax policy as an extention of politics, similar to Clausewitz’s assertion that war is an extension of politics. We wanted to encourge home ownership so we allowed deductions for interest and real estate taxes. However we do it, we need to understand as government takes over larger portions of the economy, the government exercises control in both taxation and granting benefits. To me that is road that should be a lot less traveled.

    For example, we hear about the use of alternative energy having benefits in job creation. Two items: Spain has shown that over two jobs were lost for every job created. Secondly, in every plant I have been involved with, the cost of electricity was the number one cost of operation. Assembly lines are populated with robots not people. How does raising our electric rates going to make us more competative?

    IMHO we should give a lot more thought to the use of taxation as an economic driving force.

    Regards

    Bill

  23. 23 23 Harold

    I don’t fully understand all the distinctions between sales tax and VAT, but isn’t the main difference that with VAT the businesses act as collectors of the tax and don’t have to verify that the customer is or is not an end user? Perhaps this is simplistic, but I had thought the only cost on the producer was the administrative costs. The whole tax ends up being paid by the consumer. I would welcome any clarification of the difference.

    Regarding the energy costs, we are stuck in a tragedy of the commons. It is in everyones interest to develop renewables in the long term, but doing it alone only results in short term uncompetitiveness. Therefore the only way is by international agreements. It may be impossible to get these agreements without some gesture of intent, which may have a small short term cost.

  24. 24 24 Doc Merlin

    Steve, if we are demand constrained as Keynesians believe, then wouldn’t capital taxes be better than a consumption tax?

    And, if we are supply constrained as non-Keynesians believe, then wouldn’t a consumption tax be better?

  25. 25 25 William Tarasen

    Dear Harold,

    Sorry for the time lag, am trying to launch a new product and that can entail working all the time, including weekends. Worked til 11 PM the past three days.

    A sales tax taxes all sales. A VAT taxes value added within the described production zone. In Europe, to my experience, these are added into the price of the goods, so you never realize you are paying them, similarly to an import tax, it is simply added to the wholesale price to the retailer.

    My point is simple, why penalize businesses for producing within that production zone, whether it be national, or EU or whatever.

    Unless you do what the EU does and harshly penalize imports (have you ever tried to export a car to France for instance?), you cannot protect domestic production. So a VAT MUST be accompanied by an import tariff of at least 20%, thereby violating many free trade agreements on the books. I don’t claim that is not possible, but it would create a lot of hard feelings with our trading partners. So wouldn’t a simple sales tax be a lot simpler, less offensive, and more fair?

    Regards

    Bill

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