This article first appeared at The McAlvany Intelligence Advisor on Wednesday, January 21, 2015:
Coinciding with the announcement from the irs that January 20 is the start of the 2015 tax season came the report from two wealth management consultancies, Wealth-X and National Financial Partners, that the largest transfer of wealth in world history is about to take place. With Obama's help and the acquiescence of the Congress, the IRS is hoping to partake in the windfall.
According to the Family Wealth Transfer Report, an estimated $16 trillion of wealth belonging to 211,275 ultra-high net worth (UHNW) individuals worldwide will pass to their heirs over the next 30 years. $6 trillion of that wealth is in the United States, most of it belonging to entrepreneurs who started from scratch. They will be forced to answer questions like these: how to pay the taxes from a business that has most of its assets tied up in fixed equipment and inventory with precious little in actual cash? Where will the business go, who will run it and will they be able to continue operating it successfully? Will they voluntarily liquidate it and spend the money? Should some of the estate go into philanthropy or a family foundation to support some worthy cause? Or will it be sold involuntarily at fire sale prices to satisfy the IRS?
These UHNW individuals have, or will soon hire, UHNW lawyers, accountants, and other advisors to help them answer those questions and solve those problems. The recently resurrected federal estate tax, however, wasn't designed for those with the means to avoid it. It was more designed to target the modestly successful but far more numerous entrepreneurs who, according to the report, have more than $100 trillion in assets just waiting to be taxed. That's where the real money is.
Libertarian economist Murray Rothbard taught the first great lesson about taxation back in 1969:
Taxation is simply robbery. No more, and no less. For what is “robbery”? Robbery is the taking of a man's property by the use of violence or the threat thereof, and therefore without the victim's consent….
If taxation is robbery, then it follows as the night the day that those people who engage in, and live off, robbery are a gang of thieves. Hence the government is a group of thieves, and deserves, morally, aesthetically, and philosophically, to be treated exactly as a group of less socially respectable ruffians would be treated.
Here's the math: an owner of a $10 million estate will pay taxes on $5 million of it, at the 40 percent rate, generating a $2 million tax liability to the IRS. According to the Wealth-X study, there are 1.7 million individuals world-wide with that kind of wealth, totaling more than $50 trillion. Most governments have seen the opportunity and have created their own estate tax laws, some even more draconian than those in the US. 40% of $50 trillion is $20 trillion, more than the entire output of the US economy in a year.
Among those justifying the estate tax are William Gale and Joel Slemrod, authors of Rethinking Estate and Gift Taxation which, although published in 2001, has yet to sport a single customer review at Amazon. Regardless, they think there are at least three good reasons supporting the imposition of an estate tax on the wealthy:
First, the probate process may reveal information … that is difficult to obtain [otherwise] … but is relevant to societal notions of who should pay tax.
In other words, under the force of law, private matters are now made public so that “societal notions” of justice and fair play, from the government's point of view, may be applied to those taxpayers still living.
Secondly, Gale and Slemrod claim that such a tax levied at death “may have smaller disincentive effects … [than those that] are imposed during life.” Put another way, a dead taxpayer paying taxes will object less than those living.
Finally, in an argument without either substance or clarity, the authors hold:
It is difficult to see any time other than death … to assess the total transfer made….
While death may be unpleasant to contemplate, there are good administrative, equity, and efficiency reasons to impose taxes at death, and the asserted costs appear to be overblown.
It may be observed that this is a variation on the same theme: the dead feel no pain and therefore those “asserted costs” may safely be ignored.
But there are costs, they are real, and they have negative impacts on the living. As editors at Investor's Business Daily expressed it:
People should not be punished because they work hard, become successful and want to pass on the fruits of their labor … to their children.
As has been said, families shouldn't be required to visit the undertaker and the tax collector on the same day.
A more compelling reason to abolish the estate tax permanently comes from economic scholar Benjamin Anderson, author of the classic text Economics and the Public Welfare, in which he tells the story of a young man, age 25, who inherited an estate of $12 million in 1905, long before either the income or the estate tax laws had been written. By 1935 he had, with great care and attention, nursed that $12 million into a veritable fortune of $35 million (worth, in today's money, more than $500 million). As Anderson noted:
[To a still] vigorous man 55 years old, the effects of the new taxes were paralyzing. More than three-fourths of any profits which he might have from a new venture would be taken away from him by income taxes. Any losses which he might incur from a new venture would be his own.
But further, should he die, his estate would have to pay the federal government $19,602,500, or 65 percent of his estate.
How could an estate pay this tax if it were spread out in new ventures, in assets for which no ready market existed, in assets which could not be liquidated without great loss?
It was a painful thing to watch him turn his energies from creative production to consultation with tax lawyers as to how he could save as much as possible for his heirs.
It was a painful thing to watch a vigorous man of 55 turning from creative activities to preparation for death.
Any tax levied on capital starves the capitalist system of the very fuel it needs to survive and prosper. While the UHNW people will be able to avoid paying most of these taxes through credits, marital deductions, and exemptions, the more modestly successful, in vastly greater numbers, will have their capital “robbed” through force by the state, the theft justified in the name of “fairness,” “justice,” and “equity.”
That capital, instead of being invested in successful on-going businesses, will be squandered instead by politicians buying votes from those dependent upon the largess of government, using funds robbed from their rightful owners.
Marketwatch.com: Prepare for the largest wealth transfer in history
Family Wealth Transfers Report
New York Post: The greatest wealth transfer in history is coming
History of the Estate Tax in the US
Inflation calculator: $30 million in 1935 is equivalent to $518 in 2014
Amazon: Economics and the Public Welfare, by Benjamin M. Anderson
IRS announces start of 2015 tax season: January 20, 2015
Amazon: Rethinking Estate and Gift Taxation, by William Gale and Joel Slemrod