Some Thoughts On One Justification For The Estate Tax

Weekend Edition had a segment on the estate tax this morning which included an interesting comment by Abigail Disney, grand-daughter of Walt. When asked why she supported the estate tax the had the following to say:

It's absolutely an accident of my birth. And that's sort of the point — that there shouldn't be dynasties built around the simple good luck of being born related to somebody very wealthy.

I found myself wondering what, specifically, she meant by that, since certain interpretations of the above appears to have some fairly radical consequences. Presumably she's not against dynasties per se as the existence of publicly notable families, by itself, doesn't seem morally odious. Rather, her comments seem to be more in line with the views of the luck egalitarians i.e. she has no moral claim to money earned by her ancestors. So stipulated, but there must be more to it than that, since the imposition of an estate tax doesn't follow directly from her lack of moral standing.

Reading between the lines a little she probably feels that wealth-based dynasties needlessly perpetuate social and economic inequalities in our society. Their existence represents a net loss to society as a whole and, consequently, government is justified in impeding their formation through the imposition of swingeing estate taxes. That's an arguable conclusion, to say the least, but its not what got me thinking after listening to the broadcast. Instead I started thinking about the effectiveness of the estate tax as a social leveler and what other interventions might be justified using a similar rationale.

I'm not the least bit convinced that the estate tax represents an effective mechanism reducing societal inequality. The tax doesn't kick in until the gross estate exceeds $3.5 million... that's a whopping great amount of money. Barring an exceedingly large number of inheritors to the estate each one will still be firmly in the "haves" category post-tax. Their wealth may be significantly reduced, but they're still rich relative to the vast bulk of the American populace, so the imposition of the estate tax doesn't materially effect inequality in this regard.

Now, it could be the case that the government effectively re-distributes the proceeds of taxation, thus reducing overall social inequality, but don't hold your breath. Discussions about the budgetary impact of the estate tax (see, for example, here and here) talk about using the revenues thus generated to defray the general expenses of the Federal government rather than directing it specifically to inequality-reducing social programs or anything of that nature. In the end Congress still has to decide to spend the money on worth causes; good luck with that. On cursory review it looks like the estate tax really wouldn't do all that much to address Abigail's concerns; even with the tax in place the rich will stay rich and the poor stay poor.

Now, what about the major premise underlying the estate tax, that the imposition of a grossly disproportionate¹ estate tax is justified on the grounds that it provides an (ostensible) net benefit to society? One of the problems with the estate tax as a leveling mechanism is that it simply happens too late; between the time they amass their fortune and the time they shuffle off this mortal coil the worlds' rich grandparents/parents/etc. have ample opportunity to spread their largess to younger relations. From a societal perspective its makes negligible difference if Uncle Sam takes 45% of some rich uncle's estate if he's already paid for the college education of 10 nieces and nephews; those people are permanently better off than the bulk of their peers as a result of that expenditure².

Following this logic, if we really want to ameliorate the inequalities caused by the accumulation of wealth then you have to stop that wealth from being accumulated in the first place. Question: Would Abigail support a wealth tax? Miss Disney's reasoning is equally applicable in this situation; her very birth into the Disney family is a matter of luck. Moreover, such a tax would, for the reasons outlined above, be more effective at achieving the goal of reducing social inequality. There's still the question of property rights, but once you've gone down the road of supporting an estate tax that doesn't seem to be all that big a deal. A will reflects, after all, a choice made by a living person; that they're dead when its executed makes little difference. If you can take a chunk of their wealth once they're dead there seems no reason why you can't take a similar chunk while they're alive.

I suspect a wealth tax, at least of the magnitude necessary to materially reduce social inequality, would be politically infeasible. But from a purely philosophical standpoint it seems just as justified (if not more so) as the estate tax. If we find the concept of a wealth tax to be unpalatable then that suggests we should re-examine our support for the estate tax as well.

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1 Relative to the amount of government resources consumed in the estate transfer process.
2 This is a specific example of a more general observation that, in the US at least, there is a strong correlation (as high as 0.5 if this paper is to be believed) between parental and child income levels. Or, to quote Everlast: "You know where it ends / Yo, it usually depends on where you start".