What do you think of the estate tax? Sounds fair right? After all, it only applies to people with estates worth millions of dollars. If you're like me in the past, you probably haven't thought much about it. But the thought of a rich kid being handed down millions of dollars seems unfair and taxing that money seems reasonable, right? Well, that's the way I used to think. However, listening to libertarians like Peter Schiff makes me see things in a new way. And the estate tax is no different.
In one of Schiff's podcast episodes (above), he makes a lot of really great points regarding the estate tax. Though you'll get a good perspective on the estate tax here, I still recommend listening to his podcast episode. He starts talking about the estate tax at 7:35. I faithfully listen to his podcasts for updates on the economy.
One of Schiff's main points for proponents of repealing the estate tax, such as Donald Trump, is they should focus on how the estate tax hurts employees and consumers. Not just the rich kid receiving the inheritance. That's because people have no sympathy for the rich kid receiving millions from his parents. They do, however, have concern for job losses and higher prices. Before we get deeper into that, let's first examine why the estate tax is immoral.
The Estate Tax Violates Private Property Rights
Taxing someone when they hand their property down to their heirs is theft. Private property rights must be protected and your business and net worth are certainly your private property. If you can't give your private property away, you don't own it. It's easy for us to think about how unfair it is for someone to get handed millions of dollars of property, and to think they should share a small portion of it with us through taxes, but let's consider how fair it is to the person who actually earned that money.
An entrepreneur that likely worked his/her butt off to earn that much money has already took a lot of risks, probably made sacrifices, taken losses, and paid a lot of taxes to accumulate that much wealth. We have a progressive income tax, where the more money you make the higher percentage of taxes you pay on that income. Someone who has accumulated millions of dollars has probably already paid millions of dollars in taxes, which is far more than the average American. At top income levels, about half of what you make gets taken in taxes! Then the government wants to take half again when you die? That's robbery!
I used to think this was fair and even a good way of redistributing the wealth from the rich to the poor. Besides the fact that the government already takes more than enough of our money for taxes, and that it's wrong to tax people just because it's a lot of money, there are unintended consequences that take place when you try to tax someone's estate. Underestimating unintended consequences is one of the common mistakes lawmakers make when they let politics cloud their judgement of economics.
Economics Isn't A Static Thing
Politicians act as if they can pass laws without people changing because of those laws. Yet people do change their habits when new laws are made, especially if it costs them money! People like saving money and will get around the tax if they can. The ultra-rich hire a bunch of attorneys and accountants to circumvent the system by putting their property in trusts, using tax loopholes. The upper-middle class are going to have a harder time doing so, so they're more likely to get hit with the estate tax. A lot of the rich bypass the estate tax, so the government doesn't actually bring in that much tax revenue with the estate tax.
Unintended Consequences of The Estate Tax
Businesses spend lots of money on attorney fees to avoid paying the estate tax. We'd all be better off if that money were invested back into the company instead. Companies could spend that money to become more efficient and provide better products or services for less cost. That would benefit the consumer. It's a waste of resources for a company to spend money avoiding an immoral tax. It's better to have businesses focusing on building their business than trying to keep the government from taking their wealth. The estate tax damages the economy too much for the little bit of income it brings in for the government.
How The Estate Tax Shuts Down Businesses
If someone is being handed a multi-million dollar business, but they have to pay an estate tax, they may not even be able to pay it! Maybe the business doesn't have much in liquid assets, and they're not being handed down much cash. In that case, they'd be forced to sell the business to pay the estate tax. Imagine spending a lifetime building a successful businesses and your child being forced to sell it when you pass away to pay your estate tax. After taking half of their income they take half of what's left when you die. But don't worry, they only come after the millionaires. Of course, that's only because it's not worth their effort to come after poor people's estate.
The estate tax causes there to be less jobs because a business just had to shut down. Now that there's one less successful business, the competitors can raise prices because they have less competition. This ends up causing less jobs and higher prices for the consumer. That's not good for the economy.
Schiff says he bets businesses spend more money avoiding the estate tax than the government takes in from it. That means the estate tax hinders business growth more than anything. He even goes as far as saying the government would benefit more from repealing the estate tax because then there would be more businesses paying taxes, and more employees paying taxes.
Businesses Should Think Long-Term
Another great point Peter Schiff points out is that businesses should think long-term. But if you know your business won't survive the estate tax, you won't want to make investments that won't pay off until after you're dead.
Business owners should raise their kids teaching them the family business. Who else better to take over the business than the child of the business owner? The child may have been brought up being around the business its whole life. The child should be able to continue its parents legacy if it wants too. The estate tax discourages that. There's no incentive to train your child to run the family business if the business won't be transferable due to the estate tax. Not only does that destroy the family business, but it increases the chances of the kid squandering the money. It also encourages the business owner to squander his money before death because the government is going to take half of it anyway!
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