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Pepperdine University School of Law

Saturday, March 30, 2013

NY Times: Is the Estate Tax Doomed?

Estate Tax LogoNew York Times op-ed:  Is the Estate Tax Doomed?, by Kenneth F. Scheve, Jr. (Stanford University, Department of Political Science) & David Stasavage (NYU, Department of Politics):

With income inequality at levels not seen since the 1920s, and low economic mobility, some liberals hope that in the coming years our lawmakers will face intense political pressures to maintain, and even raise, taxes on inherited wealth. In this view, economic realities are building a compelling case for a more progressive tax system.

But judging from the experience of other wealthy countries, the opposite may be true. As inequality has risen in the developed world, many governments have been dismantling — not increasing — estate taxes. Countries from Austria to Canada to Sweden have abolished estate taxes outright.

There is nothing inevitable about high estate taxation in a democracy — even in an era of fiscal inequality, and even if a country is in fiscal crisis. Estate taxes have survived when their proponents have demonstrated that they are needed to ensure shared sacrifice in a collective effort. Over the past two centuries this has most often happened during the most extreme instance of national purpose: mass warfare. In an article published last year in the American Political Science Review, we presented evidence covering estate or inheritance tax rates in 19 industrialized countries over two centuries [Democracy, War, and Wealth: Lessons from Two Centuries of Inheritance Taxation:

In this article we use an original data set to provide the first empirical analysis of the political economy of inherited wealth taxation that covers a significant number of countries and a long time frame (1816–2000). Our goal is to understand why, if inheritance taxes are often very old taxes, the implementation of inheritance tax rates significant enough to affect wealth inequality is a much more recent phenomenon. We hypothesize alternatively that significant taxation of inherited wealth depended on (1) the extension of the suffrage and (2) political conditions created by mass mobilization for war. Using a difference-in-differences framework for identification, we find little evidence for the suffrage hypothesis but very strong evidence for the mass mobilization hypothesis. Our study has implications for understanding the evolution of wealth inequality and the political conditions under which countries are likely to implement policies that significantly redistribute wealth and income.]

Our research identifies the political reason that estate taxes, and taxes in general, became more progressive in countries that mobilized for war. Proponents of progressive taxation made a clear case that if the broad population was to sacrifice for the war effort, then on grounds of fairness the wealthy should make a financial sacrifice to pay for the war. ...

The question for supporters of the federal estate tax, and for proponents of progressive taxation more generally, is how the downward trend in estate taxation might be stopped. As the United States shifts to fighting wars with precision weapons and a relatively small volunteer Army, the argument that taxation of the rich is necessary in wartime to ensure equal sacrifice will no longer be convincing. How can one ask the wealthy to sacrifice for war when much of the rest of the population isn’t really sacrificing either?

We believe that the future of the federal estate tax will instead depend on its advocates’ showing that it is needed to ensure shared sacrifice of a new kind in an era of more limited wars. The same can be said for progressive taxation in general. Advocates of progressive taxation cannot assume that rising inequality will create irresistible pressure for higher taxes on inherited wealth. They will need to construct a compelling narrative of shared sacrifice, but shared sacrifice for what?

Our research shows that a narrative like this cannot be constructed out of thin air. It instead requires dramatic external events providing proponents of progressive taxation with a way to recast the debate. It is always possible that economic crisis could constitute such a new event. Absent a new narrative of this sort, we expect a continued, long-run trend toward lower taxation of the rich, and as part of this, lower taxation of estates. This also implies either that federal revenues will not rise — or if they do, then new revenues will most likely come from nonprogressive sources like a national sales tax. In short, the survival of the estate tax, and of progressive taxation as we have known it, may only be temporary.

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Absent an estate tax, it would seem that built-up wealth would be divided among offspring, thus dissipating over time. Does the estate tax foster the creation of legal entities (e.g., foundations) that conserve that built-up wealth? If the concentration is ipso facto 'bad', shouldn't foundations et al. be allowed only a limited life?

Posted by: dan | Mar 31, 2013 5:24:01 AM