DEATH TO DEATH TAXES,
PART II: THE MORAL CASE
Edward J. McCaffery

The so-called death tax has been in place since 1916. It has never raised much money, in absolute or relative terms. Economists plausibly argue that the tax might even lose money, on balance. There is also the real possibility of decreased work and savings by our wealthiest citizens. The total costs of the death tax may well run into the hundreds of billions of dollars, as a prior column explored.

But money isn’t everything. After all, the best arguments for the death tax have never been narrowly economic. Proponents rest their case on moral grounds, arguing that the death tax is fair—because it falls on the most fortunate few, increases the overall progressivity of the tax system, breaks up large concentrations of wealth, and attempts to level the playing field so that the sons and daughters of the rich won’t have undue advantages in this world.

That’s all perfectly noble. But the problem with the moral case for the death tax is that it is wrong, as both a factual and a moral matter. In terms of the facts, nearly of a century of experience have taught that it is easy enough to avoid most of the tax’s sting by passing on wealth in complicated trust forms. Inequalities have gotten worse, not better, in the face of the tax. But the death tax isn’t just ineffective. It’s also unfair. The best arguments against the death tax turn out to be moral ones, too, and the balance of the fairness arguments suggest repeal of the whole mess.

To see this moral case, consider what the death tax is. It’s a tax on wealth that is left over at the end of one’s life. It thus applies only to people who have worked hard and who have saved well. Decadent spenders and conspicuous consumers get off tax-free. Evoking the two best sellers mentioned in the prior column, why should Uncle Sam be dancing on the graves of the many millionaires next door, thereby encouraging and rewarding rich people to go on grand binges and die broke?

What of those noble arguments about breaking up large concentrations of wealth and making heirs pay something for their good fortune? It turns out that present law, despite its good intentions, makes these problems worse. Under today’s tax system, wealthy people who are well advised and plan ahead can get millions of dollars to their descendants, tax-free. The kids pay nothing on the receipt of the money. Nor do they pay any federal tax at all—no income, no social security, no nothing—when they spend away, even if they burn through the family fortune in a few years or so. That’s pretty crazy.

The people seem to have figured this out on some level. Polls consistently show that Americans do not like death taxes. Meanwhile, there is much support for the idea of a general consumption tax—a national sales tax, say, or even something that looks like the current income tax but with a better, more systematic, exemption for savings. Since all money is either saved or consumed, any tax that avoids falling on savings is a consumption tax. And there is no moral reason to tax savings in the first place. Savings is a perfectly good and noble activity, one that helps us all through its effects on the capital stock, which in turn keeps interest rates low for middle class consumers, homeowners, and students. The death tax is backwards on these scores. It is a non-consumption tax—a tax only on wealth that individuals have chosen not to spend on themselves.

The concerns about heirs and the concentration of wealth can and should be met without a death tax. Imagine, for example, that we had unlimited tax-free savings accounts, like IRAs under current law. No tax would be due on money earned and saved until and unless it is withdrawn and spent. A wealthy person could give all or part of her account to any one, at any time, on life or death, without triggering a tax on the transfer itself. When and as the heir withdrew the money, he would be taxed. If the heir got greedy and tried to pull all of the money out too quickly, to spend on foolish whims, the burden of progressive rates would fall on him. In contrast, special exemptions for medical, educational, or charitable spending might encourage these uses. Wealthy patrons, who have themselves demonstrated thrift throughout their lifetimes, should like this plan for monitoring their children’s spending habits. On a social level, the plan focuses the act of taxation consistently on private consumption, not on the socially useful activities of work or savings.

This is the kind of place we can get to if we start to have a more serious, balanced, and reflective dialogue about tax, one that respects popular morality. Americans like "sin" taxes, as on alcohol and cigarettes. The death tax is an anti-sin, or a virtue, tax. It is a tax on industry and thrift, on inter-generational altruism, on work and savings without consumption. It’s unfair, plain and simple, and should be killed, once and for all.

Part three of a three part series.

EDWARD J. McCAFFERY is Professor of Law at USC Law School and the California Institute of Technology. He is the author of TAXING WOMEN (1997) and the forthcoming book, THE NEXT GREAT AMERICAN TAX REVOLT.