Why Do We Allow Inheritance at All?

I am a disagreeable person, which is to say that I cannot stand to be in a room full of people agreeing with me.  It gives me the creeps.  I cannot resist the urge to play devil's advocate, to argue the facts not placed into evidence by group consensus--at liberal events, I'm the psycho conservative, but at libertarian colloquiums, I'm the one arguing that privilege and wealth are real problems that simple rules may simply embed more deeply.

So I feel a little thrill of inspiration when Reihan Salam, one of my very favorite writers, says "I often say that I'm not in the persuasion business. Rather, I'm in the provocation business. Our worldviews are embedded in friendships, loyalty, aspirations, and much else. The kind of person we want to be shapes the kind of argument we're inclined to believe. I think I'm doing my job well when I interrupt the pattern, and prompt a reexamination of received views, partly because I enjoy reading people who prompt me to do the same."  Luckily, I have a bit of contrarianism that I've wanted to air, and a series of Kevin Drum posts on using estates to pay for Medicare that has inspired me to make (drumroll please) . . . the case for the 100% estate tax.

No, really, I'm serious.  After all, why should kids be allowed to inherit?  I know, you are about to say something along the lines of "I worked hard so that my kids could . . . "  That is a noble emotion.  But at the point at which this question becomes relevant, you will be dead.  And dead people don't have rights.  They don't own property. They don't get to make decisions.

Of course, wills are written by the living.  But wills are an attempt to give your children stuff at no cost to yourself; they get it only when you can't use it.  That doesn't seem so laudable, really.  I might admire someone who gives their stuff away while they're alive.  But really, there is no such thing as a "generous bequest".

I don't see by what right people should be allowed to order living people how to dispose of their stuff after they're beyond caring.  I think people should be allowed to make generous gifts while they're still alive, without gift tax. (Though I think the recipients of those gifts should have to pay income tax on it; I don't understand why we'd want to tax income people get by working, but not income people get by being born.  Being born is about the most tax-inelastic thing you can think of.)  But once people are dead, then I can make a pretty compelling case that in a modern economy where extended families are not a major economic unit, there's little justice case for inheritance.

To wit: the living person was entitled to dispose of their assets, but they are no longer living, and are not entitled to anything except an undisturbed grave.  Since they are out of the picture, we must look to the heirs.

Do they deserve to inherit?  By virtue of what? Being born?  Having parents?  Maybe they put up with their parents, and their parents were difficult, even terrible.  But if the parents wanted to pay someone to put up with them, they could have done so when they were alive.  And no matter how awful your parents were, "putting up with them" doesn't seem so terrible that it should entitle you to all their stuff, tax free.  Even if your mom is Joan Crawford, I can pretty much guarantee that foster care or institutionalization would have been worse.  Why not give the stuff to those kids?  Because they were unlucky enough to be forced to endure their abuse from poor people?

Inheritance not only hands people valuable income in return for something we don't really want to further reward--being born lucky--but also, in doing so, it entrenches the least attractive feature of our economy: the fact that people who are born to affluent parents are much more likely to themselves be affluent than children born to the less well-heeled.  Lack of economic mobility is generally regarded as a bad thing that we should combat.

Yet so many of our institutions, from the geographic organization of our schools, to the financial distribution of our inheritances, reinforce it.  Some of those things are not going away (we should not, and will not, order affluent people to move into poor school districts, or shut down research universities for conferring unfair advantages on the mostly affluent students who have the ability to gain admission).  But what are the social benefits that inheritance conveys to offset its drawbacks?  I think they have to be pretty large to justify letting dead people order us to perpetuate the economic status quo.

So I can make a moral case for a 100% estate tax.  Which is, in some sense, what Kevin Drum is doing when he advocates "letting the dead pay for Medicare".  He would make Medicare a senior creditor on estates; the government would get first crack at all the assets until the bill for all the Medicare services consumed has been repaid, or the estate runs out of money.

In most cases, the government would take everything.  And it's a superficially attractive policy--the idea that you're entitled to free health care from the government, and to leave your children a tidy inheritance, seems faintly ludicrous to me, for all that many Americans embrace it.

But there may be practical drawbacks; we might lose any social benefits that inheritance currently conveys.  Let's think about the possible problems with our estate confiscation.

The first is the bevy of objections about family businesses and farms that is always raised when the estate tax comes up.  These are bigger problems than Democrats admit, but they're not insurmountable problems, and they're not really all that common.  Facilitate the transfer of these companies while the business owner is alive, or set up a trust with the kids. Or set up a special exemption for the family-owned-and-operated business--which includes a provision that the business has to still be operated by the family five years later, or tax and penalties are owed.  Yes, this will create some bad situations--the crippled and broke business owner who can't sell because he'd owe too much tax.  But if you discard the assumption that said business owner had a right to get a valuable business for free, this doesn't really seem that desperately unjust.  I'm wiling to leave family firms and family farms intact because there's some compelling benefit for society in having them cross generations. I am not willing to do so simply because people like getting stuff for free--this is that great paradox, a truth so universal that it is a completely useless guide to policy.

The second is sentimental items: family homesteads, Grandma's engagement ring.  I'm not worried about the latter; one way or another, by the time the probate court gets involved, small sentimental items with poor paper trails will have vanished.  I'm basically okay with this. The latter is more troublesome, but we cannot build an entire tax policy around the principle that "nothing sad will ever happen."  In these days of labor mobility and agribusiness, there are very few precious family homesteads that have been in the family for 200 years.  Your childhood beach home is no doubt a special place, but I'm not sure there's a policy interest in making sure that your grandchildren, too, can vacation there.

The third is disabled kids; many parents want to set up trusts for them.  This seems like a job for a large life-insurance policy and a dedicated trust established now.

But these aren't the problems that worry me.  The practical problems I fret about involve the structure and level of economic activity.  Does the estate tax discourage people from working or saving?  Does it create distortions in the way that we structure firms, investment portfolios, or our lives?

I don't have an answer to that.  Without an estate tax, parents probably work harder and longer (Warren Buffett does it just for love, but not so all the owners of 7-11 franchises and button factories).  But kids probably work less hard.  That's probably a net loss to the economy, since successful parents are on average more productive than their children, but how big is the loss?  Could that loss be offset if we used the 100% estate tax to fund dramatic reductions in income or capital taxes?

Saving is even more problematic.  Kevin doesn't think that many people would spend down their estates to avoid his Medicare tax, but I think he's grossly underestimating the chances.  There's already quite a large problem with people structuring their estates to get around Medicaid restrictions to qualify for subsidized nursing home care; we don't see more of it arguably because only a minority of seniors end up in nursing homes, and not all of them are there long enough to make a significant dent in their assets.  By contrast, roughly 100% of seniors get Medicare.  I think people will make very different decisions about spending, saving, and gifting if they know that there's no hope of leaving anything to the kids.  And our economy is already far too heavily biased towards consumption.

Then there are the distortions.  Life insurance is the obvious one; people might start liquidating their estates to buy insurance.  (It's no surprise that insurance companies are heavy lobbyists on the estate tax issue).  We want life insurance to be tax free, because it's supposed to take care of dependents who would otherwise be left destitute--it's a replacement for lost income, not a capital gain.  But we don't want to funnel all of our nation's assets into terrible whole life policies.  And that's the least offensive of the ways that people might start structuring around a substantial estate tax, up to and including renouncing their citizenship.

Plus, adults hoping to be left something in the will might be performing valuable services for society, like visiting Mom in the nursing home to make sure that they haven't tied her to a bed and left her to die.  (on the other hand, there are the rich people who get tied to a bed and left to die by their heirs so that they won't be able to change the will.  Which effect is more powerful?)  The trend towards a society based more on interactions with strangers, less on kinship ties, is generally a good one.  But the family still serves useful functions that we don't want to get rid of.  If we mess with inheritance, are we disrupting an institution that's tremendously important to both individuals and to society?

Then there's the question of where the money goes.  Do we want the government owning a substantial portion of the nation's asset base?  Or liquidating estates at fire sale prices?  (Maybe, to the latter; it's not clear that this would make the economy worse off, and it might lead to more efficient allocations of capital that currently languishes inside family trusts or firms.)

These are all complicated empirical questions without obvious answers.  Most of the really absurdly high estate taxes in the world have been either repealed or ignored.  On the other hand, estate taxes long predate capitalism, and capitalism emerged anyway, so modest taxes are fairly customary and obviously not crippling.

So while I can make a moral case for the 100% estate tax, I'm more leery of the practical case.  We are back at Chesterton's Fence:

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, "I don't see the use of this; let us clear it away." To which the more intelligent type of reformer will do well to answer: "If you don't see the use of it, I certainly won't let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it."

This paradox rests on the most elementary common sense. The gate or fence did not grow there. It was not set up by somnambulists who built it in their sleep. It is highly improbable that it was put there by escaped lunatics who were for some reason loose in the street. Some person had some reason for thinking it would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable. It is extremely probable that we have overlooked some whole aspect of the question, if something set up by human beings like ourselves seems to be entirely meaningless and mysterious. There are reformers who get over this difficulty by assuming that all their fathers were fools; but if that be so, we can only say that folly appears to be a hereditary disease. But the truth is that nobody has any business to destroy a social institution until he has really seen it as an historical institution. If he knows how it arose, and what purposes it was supposed to serve, he may really be able to say that they were bad purposes, that they have since become bad purposes, or that they are purposes which are no longer served. But if he simply stares at the thing as a senseless monstrosity that has somehow sprung up in his path, it is he and not the traditionalist who is suffering from an illusion.
It's quite possible that a 100% estate tax--or some near equivalent such as Kevin proposes--would be entirely fine.  But I'm not sure I understand all the roles that inheritance is playing in our economy, and our lives--which means that I'm fairly sure I don't know what the effects will be.  So I'm hesitant to impose such a tax, even though on principle I think it's a fine idea.