The View From 1776

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The inheritance tax, at the most fundamental level, is an anti-capitalist tax intended to prevent the accumulation of capital in private hands.  Its aim is to transfer ownership of all property to the political state.  For that reason, in the 1848 “Communist Manifesto,” Karl Marx proposed, among the immediate measures to follow the workers’ revolution, the abolition of all rights of inheritance.

Liberal Republicans and Democrats argue that repealing the inheritance tax is fiscally imprudent, because we need all available tax revenues to cut the Federal budget deficit.  They also argue that permitting the inheritance of wealth is morally unjustified.

With regard to fiscal prudence, the net amount of revenue from the inheritance tax is almost meaningless in the totality of the Federal budget.

Total receipts from both gift and estate taxes (the Federal budget combines the two) were only 1.15% of total Federal tax revenues in 2005.  In addition, Congress’s 1998 Joint Economic Committee report on the economics of the inheritance tax stated, “The enormous compliance costs associated with the estate tax are of the same general magnitude as the tax’s revenue yield, or about $23 billion in 1998,” (total gift and estate tax receipts in 1998 were $24.1 billion).

Liberals warn that eliminating the inheritance tax will “cost” the government more than $1 trillion over the next ten years.  In that figure they include $222 billion in interest payments on the national debt, on the dubious theory that inheritance tax receipts would be used to pay down the national debt and reduce interest payments to that extent.  Even during the brief Clinton balanced-budget interlude, however, not a penny of the Federal debt was retired.

The remainder of the $1 trillion is a projected, cumulative $808 billion ten-year elimination of inheritance taxes.  Reaching that number requires an annual growth rate of 24.6% in gift and estate tax receipts.  From 1990 to 1999, the largest ten-year growth period since 1940, the annual growth rate of gift and estate tax receipts was only 10.3%, less than half the projected rate.

The $808 billion number also requires $179.26 billion receipts in the 10th year (2014), an increase of 624% over the 2005 figure of $24.764 billion.  This is almost 4.5 times greater than the largest increase in gift and estate taxes over any ten year period since 1940.

With regard to liberals’ contention that an inheritance tax is a moral imperative, I noted earlier that President Woodrow Wilson was able to get Congressional approval for higher taxes to finance our World War I preparations only at the price of including an inheritance tax.  Liberal Republicans and Democrats openly declared that the purpose was not to raise revenue, but to “soak the rich.”

The prevailing sentiment among Wilson-era Progressives (today’s liberals) was expressed by Herbert Croly in his highly influential 1909 book “The Promise of American Life.” Croly, it should be noted was the founding editor of The New Republic, the leading liberal periodical.  Riding the familiar liberal-socialist pony of egalitarian wealth distribution, Croly wrote:

“Existing inequalities ought to be mitigated; and they can be mitigated without doing the slightest injustice to their owners.  The means to such mitigation are, of course, to be found in a graduated inheritance tax.... The preservation intact of a fortune over a certain amount is not desirable either in the public or individual interest.... The multi-millionaire cannot possibly spend his income save by a recourse to wild demoralizing extravagance.... There is a general disposition to justify the possession of many millions by the frequent instances among their owners of intelligent public benefaction.... If wealth.... accumulated in large amounts has a public function.... a society is foolish to leave such a duty to the accidental good intentions of individuals.  It should be assumed and should be efficiently performed by the state.”

This echoes the doctrine of Francis Noel Babeuf, a utopian socialist during the French Revolution.  Babeuf intended that the political state seize the entirety of individuals’ property at their death, so that within fifty years all property would be owned by the state.  Thereafter production would be managed by popularly elected officers, who would determine the needs of the people and divide all goods and services among the workers.

Undergirding this hardy liberal-socialist perennial is the unfounded assumption that the intellectual planners of the political state are more efficient and smarter than private owners of capital.  Theoretically, if property is taken out of the hands of greedy individuals, planners will produce more useful goods and services than private business, so that there will be more than enough to raise everyone’s living standards while giving everyone equal access to society’s wealth.

This was the rationalization behind Hillary Clinton’s proposal in 1993 to nationalize the entire health care industry.  She and her adviser Ira Magaziner stressed that Federal control would streamline processing and eliminate “wasteful” layers of private management, with the savings passed along in lower health care costs to individuals.

Mr. Croly’s assessment, which is repeated by today’s liberals, fails to distinguish between capital and income.  He assumes that accumulated capital can only be spent wastefully or kept sequestered and unavailable to the workers, from whom in socialist theory it was stolen via the capitalists’ profits.

In real life, even the most profligate inheritors of wealth must keep their fortunes invested in productive assets, which create jobs and add to the nation’s total wealth, while producing current income for the owners.  Failing to do so they endure the “shirt sleeves to shirt sleeves in three generations” phenomenon.  The continual churning in the ranks of our wealthy, with few people or families staying very long in the top ranks, makes clear that this fate is a reality.

Liberal-socialists focus on consumption and fail to acknowledge the absolutely essential role of private savings to provide investment capital.  This has been one of their articles of economic gospel since the intrusion of John Maynard Keynes into Federal councils during Franklin Roosevelt’s New Deal.  According to Keynes, private savings reduce consumption expenditures and trap the economy at a level below full employment.  Only heavy and always-rising Federal spending can fill the gap to improve business conditions and create jobs. 

In that paradigm, private savings are an impediment to the role of government, to be discouraged by heavy taxes on capital gains and inheritances.  The result has been an unwavering bias toward inflation from over-expansion of the money supply to finance the welfare state.  That inflation has, in effect, stolen part of the value of every person’s savings, from poorest to wealthiest.

The liberal paradigm penalizes hard work and thriftiness and rewards the improvident.  Ironically, it does very little to reduce the gap between the top and bottom economic tiers, because of the enormous sums diverted from productive investments by the wealthy to lawyers and tax accountants to create tax-avoidance schemes.

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