All taxes on inherited wealth should be abolished

In this opening argument of our case we are going to establish why engaging into free transactions between individuals especially in the form of inheritance is a fundamental freedom people should enjoy and how inheritance taxation infringes on it.

To begin with we want to emphasise that we regard leaving inheritance as not different from any other transaction between individuals happening in the form of giving gifts, such as giving an engagement ring to ones lover.. We don’t tax such things not only because it would be practically almost impossible to control all such micro level actions but, more importantly, because, we value the freedom of individuals in deciding who should benefit from ones wealth.

There are several reasons why we regard this freedom of fundamental importance. First and foremost, individuals should be able to choose the way of life they deem to be the most appropriate to them and thus bringing the most happiness. Choosing the way of life means deciding on where to live, what activity to undertake, whom to identify with, whom to help and many other things. All these choices are inseparable from the ability to freely use the wealth that belongs to an individual through property rights, because material things are most often the means through which the realisation of people’s choices is enabled.

Second, people are social beings and pursue happiness not only satisfying their own needs but also by helping others. This is particularly true about care that parent provide to their children or other relatives, with whom they share a special bond not only biologically but also emotionally. Free transactions enables individuals to guarantee prosperous and secure life for those who they care about. If exercising such right is restricted or lessened through taxation, a substantial harm is imposed to an individual, who feels less capable to and thus suffers emotionally

Third, what particularly concerns leaving inheritance, is that individuals self-actualize not only through actions made while being alive but also thinking of how the things they have created through out their lives are going to be treated in the future. Their emotional well being is lessened if they feel insecurity, for example, about whether the company they have created is going to be taken care by his children or will rather be sold and closed down because the inheritance taxes are to be paid.

Inheritance tax infringes on all those freedoms in two ways. First,by physically reducing the wealth the individuals could and may want to transfer to other. Second, by disincentives people to pursue actions they deem to be right, thus imposing emotianl harms.

It more than clear that there is a strong link between inheritance taxes and wealth accumulation. The higher are the taxes, the less wealth is transferred to the recipient, thus driving the total wealth possessed by the private individuals down. Knowing that most of the taxes collected by state are used up for short-run consumption / spending and not invested into capital, we can easily conclude that inheritance taxes directly lower the total wealth accumulated in the society (as opposed to usual effect of taxes which only redistributes wealth), as part of the wealth is taken away for short-run purposes.

In fact, this is not the only channel how inheritance taxes affect the total wealth (or, more precisely, capital) stock. The other channel is the propensity to save – inheritance taxes deter the willingness to accumulate savings. When individual knows that his private property will be taxed after his death before getting to his heirs, he is more likely to consume more today. The utility that an individual gets diminishes when the estate left to his heirs is taxed, because the net amount of inheritance decreases. Hence, he is very likely to substitute for some consumption. The money that would have been saved will be consumed. That has a negative effect on investment and capital accumulation.

Now, that we have established that inheritance taxes have a negative effect on wealth and capital accumulation, we will show what are the positive effects of wealth accumulation, and how, in fact, inheritance taxes have quite a devastating effect on the economy.

Economists have acknowledged the importance of savings in the society centuries ago, all conventional books on macroeconomics acknowledge that, too [[http://books.google.no/books?id=467QG5353JMC&pg=PA374&lpg=PA374&dq=importance+of+savings+macroeconomics&source=bl&ots=T_EM8XsYIX&sig=HYG2u_PJXKjwDPS8JKVKvHs3YI4&hl=lt&ei=hduYSp6wFeSZjAfciuWfBQ&sa=X&oi=book_result&ct=result&resnum=1#v=onepage&q=&f=false]]. When savings of individuals are put in financial intermediaries, businesses can borrow them and invest. Investment in turn builds up capital. Capital accumulation is one of the keys to prosperity – the more capital we have, the more output we can create with it. More production results in higher wealth of the people – each of us gets more goods and services than he used to get before. Hence, savings are essential for economic growth, as they work as a base for starting the cycle of the growth to prosperity. This is exactly why the third-world countries are lagging behind – they usually do not have a large capital stock, and this is exactly why most of the money piled in Africa and other countries as financial aid is mainly directed to building up infrastructure and other capital-intensive forms – this is the only way to ensure sustainable growth in the future. To sum up, wealth accumulation ensures that a society will be able to get more productive, and will not get poorer when the existing capital depreciates.

The second positive effect of wealth accumulation is the ability to sustain during tough economic times. Knowing that the “crisis examples” are very popular these times, we can’t help but bring up one. If one looks into the Baltic states, where the economic downturn was one of the most severe in the world [[http://www.wtnrradio.com/story.php?story=361]], she would notice that the propensity to save was very low, if not negative in this region. There was not real wealth accumulation, it was a consumption-based world. Thus, when the income went down and the lending bubble busted, the societies in the region suffered “quite a significant” shock . There was no wealth accumulated to help absorbing the shock. Now, if one looks into the countries least affected by the crisis (same article as above) – it’s Qatar, Yemen, Turkmenistan and Uzbekistan. One can easily guess why they were least affected – they had a lot of wealth accumulated from the oil exports. That wealth serves as a pillow to soften the downturn. Of course, the wealth from inheritance will never provide an effect of the same significance as does the wealth from oil exports due to difference in accumulation period and the magnitude itself, but the core principle is the same.

To conclude, we have shown that inheritance taxes lower wealth accumulation through two channels – propensity to save and direct wealth conversion to spendings. Then, we analyzed the effects of wealth accumulation to the economy, and showed that it both provides a base for sustainable economic growth and ensures that economies are not hit very hard during downturns. Thus, we conclude that abolishment of inheritance taxes will lead to sustainable economic growth which, after all, is one of the main goals for any government.

It is usually contended that equality of opportunity is an admirable objective and should be pursued in our society. The proponents of inheritance tax tend to claim that the tax will make the situation among people more just and equitable, because your odds of success in the society will depend less on pure luck (the wealth of your parents) and more on your skill and talent. Why should you be wealthier just because you were lucky enough to be born in a prosperous family? – That is the rhetoric that usually comes from proponents of inheritance tax. Although we hold in esteem equality and we believe that it is valuable per se, we strongly condemn the atrocious attempts to limit opportunities for some people just for the sake of achieving equality. Taking away person’s inherited wealth to achieve equality of opportunity in comparison with others is equivalent to putting out all newborns’ eyes just because there was one who was born blind. We declaim against such acts of social engineering and find them unacceptable in a free and open society.

Another popular notion is that the heirs do not deserve the inheritance, because they did not earn it by themselves. But we definitely do not see the government as the worthy one to get a share of deceased’s property. In our society we generally accept the notion that a man is free, he has a free will and the ability to dispose his private property in a way he wishes to. This includes choosing who will get his property after his death. We believe that government is here to protect our fundamental rights. We do not see in what way taking away a share of inheritance is protecting rights. It is nothing less but an arbitrary act of coercion against the will of the deceased.

One of the fundamental powers driving human behavior is the care for relatives. Throughout life, individual tries to earn a fortune not only because he wants to have a shelter and some food, but also because there is a social circle of other people around him – a social circle that he cares about. Most of the people assert that family is something that is of higher importance than anything else in their life. A person devotes time to his family, helps in various situations; finally, he wants them to inherit his wealth after death. In a way, a child is a continuity of one’s life and a person is happy to leave his property the children or other relatives.

We believe that if individual was to care only for himself he would never want to work as much (and by this, create value for society as well). Ability to generate value not only for him but also for his children gives more incentives for an individual to work harder. This is beneficial for the whole society, because more work creates more value overall. However, by imposing an inheritance tax we reduce the incentives for a behavior which is beneficial for society. We discourage people from doing it. When tax is taken, money will end up somewhere else. But it is certain that people will never be as motivated to work for unknown person’s good as much as for their own relative’s good.

To sum up, by taking away a share of person’s property after his death, we are indirectly preventing him from creating value for the society, because he will know that what he earns will be spread over many strangers instead of relatives after his death.

Much effort is spent on reducing and eliminating the inheritance tax. First, people establish trusts that are usually taxed at a lower rate than directly inherited wealth. One can also minimize the tax burden by transferring gifts that usually are untaxed until a certain level (as much as one million dollars over the lifetime in US [[http://www.irs.gov/businesses/small/article/0,,id=164871,00.html]]). The gift and inheritance transfers have lots of exceptions, such as education, charity, or other destinations. Many wealthy people use offshore tax havens to reduce the tax. Take the Russians for example, who find Cyprus a proper place to store their wealth. People who are subject to the inheritance tax are those likely able to find ways to reduce the burden, thus further weakening any positive effects.

What we find inappropriate is that people who are by no standards considered “the wealthy” are going to pay the death tax. The general level of wealth has been constantly rising and ever more people are subject to this “death tax”. For example, a pensioner, living in her well kept house that happened to be in the centre of a newly build financial centre in. Basically all people who have real estate in areas that are now very desirable would face the tax due to an unexpected appreciation of their property. Indeed, one of three British households (out of 24 million) would pay estate tax [[http://www.time.com/time/magazine/article/0,9171,1376184,00.html]]. The tax that was previously levied on the rich is falling on the shoulders of “ordinary” men, who have lesser opportunities to reduce the tax burden than the rich people, capable of employing legal and financial talents. Although this can be changed, what we find unacceptable is the arbitral nature of such taxation. It will be always debatable what is the threshold on which the tax is levied.

One of the main forces that helped our society to become the way it is was entrepreneurial spirit of businessmen. The desire of theirs to make a fortune makes the lives of everyone easier and better. What we want to have in our society is a better environment for entrepreneurs where they can sustain their businesses – the businesses that are value-adding to the society as a whole. Estate tax is something that effectively destroys family businesses. We definitely do not claim that it is happening in all an every instance, but there are cases where such taxation is disruptive to businesses. Consider a family business of substantial value. It has been successful for many years, expanding at a rapid pace. The owner was happy to finance the expansion with retained earnings – but now he finds himself in trouble, because in case of his death, his son would not be able to pay without selling a share of his business. These are the situations we are extremely discontent with, because people who create the most value in our society are unjustly punished.

Scientific studies show detrimental effects of inheritance taxes to entrepreneurial activity. Holtz-Eakin finds evidence that entrepreneurs would decrease business expansion if they would be subject to estate tax after death. [[Holtz-Eakin, Douglas. “The Death Tax: Investments, Employment, and Entrepreneurs.” Tax Notes 84 No. 5 (August 2, 1999): 782-92.]]. A recent study shows that if inheritance taxes were eliminated, probability of hiring would increase by 8.6%, payrolls by 2.6% and investments by 3% in family businesses[[Douglas Holtz-Eakin, Changing Views of the Estate Tax, February 2009, http://www.nodeathtax.org/files/AFBF_Holtz_Eakin_2009.pdf%5D%5D. This is very plausible indeed – when business owners are subject to tax, they will not expand their business so much, instead, they will put away some money so that they could be used in case of owner’s death to pay the estate tax.

The whole opposition case boils down to a primitive line “Governement needs more revenue, so let’s tax the wealth transfer between individuals. Why exactly this process? Because it takes place and… government needs more revenue.” Throughout the debate they failed to understand that in our society we do not establish taxes just to raise revenues. If it were so, we could tax any arbaitrarily chosen things, for instance, daily sun exposure of the riches. There should be some underlying principles according to which we base our decision on what a tax has to be put. If the opposition wants to tax inheritance, they should be able to give some very good reasons why exactly inheritance and not other arbitrary processes such as sunbathing should be taxed or why it is superior to simply increasing the rate of income tax. Throughout the debate we did not manage to hear any single reason for this.

Because we think that taxing inheritance is not fair, we oppose it on moral grounds. We believe that the mechanism of inheritance taxation is fundamentally wrong. In its essence, it is a tax on a gift from one individual to another. We do not think that the state has to right to intervene into family and start demanding its part whenever a something is passed on between family members. It sets a bad example – the state shows that it does not care about family as a unit. The tax infringes the basic liberties of an individual – the right to free will and the right to dispose one’s property in a way he wishes to. It limits the ability of people to pursue happiness through taking care of their relatives, guaranteeing economic safety to their children or making sure that their established business is going to be givent into good hands after their death.

We say that inheritance tax is most certainly different from other taxes. Say, income tax is paid in proportion to your income, which is a proxy for the usage of public goods that have to be provided by the government. These taxes are needed, because people have to pay for the infrastructure of the state, legal system – the basic public goods that they actually use. We do not think that the same applies to inheritance tax – it is simply a tax on income that had been taxed previously.

The only reason opposition has presented in the debate was that the tax helps to redistribute wealth. Instead, we can say quite certainly that the tax does not really help wealth redistribution.

First, we often tax capital-rich, but income-poor people. When an old pensioner with no income, but with a valuable house, is subject to inheritance tax, his children are likely to wind up in an unpleasant situation where they will have to sell the property just to pay the tax. The numbers of these cases are just increasing as the property prices are growing. Second, the real income-rich people have more potential to avoid the tax – they simply have money to hire lawyers who would help finding loopholes in legislation. However, it is not so easy for capital-rich and income-poor people: neither they have the money to hire legal advisors, nor they have the expertise and time to do it themselves.

Finally, from administrative point of view, it would be much easier to increase the income tax rate and collect revenues from there. No additional institutions would be created; wasteful spending on administrating the tax would be limited. Income tax is more difficult to avoid – then there would be no need to create such taxes as gift tax for preventing evasion and there would be no need to administer them, too. In fact, the whole case of the opposition falls apart when we look at what part of budget usually inheritance tax constitutes (usually less than 2% of a country’s budget). When we sum up administrative costs and indirect costs (people trying to avoid taxes instead of creating value), the actual contribution to the budget is ridiculous. A useful tip: if opposition likes random taxes which are there just for the sake of taxing the rich, they can also try to implement some other taxes: taxing their daily word usage or the number of countries they visit during a year. Then they could use the revenues to, in their words, make society function in a useful way.

Finally, there are numerous practical economic reasons for abolition.

One problem of inheritance taxation is that it has a negative effect on wealth accumulation in our society. The money is not saved, but instead consumed, because individuals substitute from savings to consumption. This leads to a lower capital accumulation, which is the basis of all economic activity because it provides means for production. As a result of lower capital base, the overall economic growth is reduced in the long run. Opposition pointed out that it is applicable to all taxes, because they all reduce the disposable income of an individual. While we certainly agree that they decrease income, it is also obvious that not all of them decrease incentives to save. When, for instance, income tax is applied, individual’s income decreases, but he does not get any further disincentive to save, because the earnings will stay in his or his heir’s disposal. However, once he is taxed with an inheritance tax, he has an incentive to consume that wouldn’t have been there without the tax. This is what troubles us economically and the opposition was very myopic to claim that this tax is no different than any other taxes.

Another economic problem with inheritance taxes is that they reduce entrepreneurial activity. Because of the costs imposed when the risk of owner’s death increases, businesses will invest less to avoid possible financial distress. This will cause poorer employment prospects, less growth and less value-added. As simple as it gets. Please, note how desperate the opposition was in attempting to rebut our argument – this is too good to be left out. The notion that there are many reasons why small businesses fail and, because of this, estate tax should not be taken seriously is utterly absurd. This is equivalent to claiming that just because there are 10 factors causing cancer, nutrition or clean environment become not important. One of the flaws that opposition makes in its reasoning is that it takes means and medians as support for their illustrative case. In our argument we already agreed that inheritance tax is not the major problem in every instance. What we were discontent with were various special cases where circumstances were far from average situation. For instance, American Family Business Institute has a collection of such stories[[http://www.nodeathtax.org/resources/testimonies]]. The opposition claimed that they can use the money to support other social programs and other businesses. Well, you can also attempt to create perfect income equality, but as we know, this is just not so good in creating wealth, is it? The opposition thinks it is perfectly fine to take money out of functional profitable businesses just for the sake of some vague opportunity. Disincentive to invest is called a bogeyman by them – as a proof for this we get a quote which carries no relevance to investment incentives, in fact, it is about increase in value of estates not being taxed. Finally, the opposition doubted the validity of our cited study. To be honest, we also doubt it. There are no studies that would be perfect – and you never know anything with 100% confidence, and this is especially true for social sciences. We gave our economic reasoning, and we also gave some scientific evidence to confirm it (and there are many papers that confirm similar results[[http://www.nodeathtax.org/resources/studies]]). Opposition merely tried to deny our evidence while never tackling our argumentation and this is where they failed.

Abolishing inheritance taxation would strengthen the incentives to create value and use the wealth in a sustainable manner. Caring about the well-being of one’s offspring is definitely one of the driving forces in human’s behavior. It is quite certain that people would try less hard for somebody else’s good. Opposition emphasized the importance of current consumption. What we contend is that future consumption is also as important: it is not only important for the people living in the future, but also for the people living right now, because they want their children to live decent lives.

The case for abolishing inheritance taxation is rather clear. There are no fundamental principles supporting the tax, it is morally repugnant, and economically unsound. Because of that, we are proud to propose!

If you believe in redistributive justice, why not redistribute income and wealth absolutely equally in the society? Following your logic, government can simply intervene into the lives of people whenever it finds it appropriate (whenever it finds some people too rich, too clever, or too beautiful) for the sake of some intangible common good. The opposition claims that no rights are absolute and they can just interpret them in a way that would benefit the society. This is exactly the kind of reasoning that had build socialist societies in the past. And as far as the history tells us, these societies did not endure for very long and they were not too successful.

Let us point out that the very essence of opposition’s argument is “Let’s tax rich, because they are rich”. First, the opposition has no sense of the essential human rights that are usually recognized in our society and there is an fundamental clash between our viewpoint and theirs. Let us note that we do not oppose taxation. We support taxation when it is equal for all people – for instance, flat income taxes or value added taxes – then the collection to create some form of public good and to correct for externalities can be justified. We defy taxation when its whole point is simply to tax the ones who are more wealthy than you. We defy taxation when it intervenes into the most private areas of our lives – transactions between us and our family members.

Second, the opposition has no sense to which extent the rich are already being taxed. For example, top 1% in the United States are paying more in income taxes than the bottom 95% [[http://www.taxfoundation.org/taxdata/show/24955.html]]. These are the people who already effectively finance the budgets of our countries with income taxes. The inheritance tax is a double taxation on the income that had been previously taxed. We do not believe that taxing the same thing twice is just, so do some other people – the EU, for instance, calls for elimination of double taxation in various instances [[http://europa.eu/legislation_summaries/taxation/l26038_en.htm]].

Third, the revenues from the tax, which the opposition find so important, are negligible, raising a question whether they exceed the administrative costs of the tax. This was investigated by scholars previously [[Munnell, Alicia H. “Wealth Transfer Taxation: The Relative Role for Estate and Income Taxes.” New England Economic Review (November/December 1998): 3-28.]]. Munnell contends that the costs are of roughly the same magnitude as the revenues raised. The revenues raised are small indeed – even in the US, which has one of the highest inheritance tax rates, 2008 revenues from inheritance tax combined with gift tax contributed only 1.1% to the federal budget [[http://www.heritage.org/research/features/BudgetChartBook/Social-Insurance-Taxes-Account-for-36-percent-of-All-Revenues.aspx]]. The opposition was quick to point out that if there is substantial evasion, there are various ways how to stop that – for example, taxing gifts. Such efforts will ultimately increase the administrative costs for something that has little contribution the country’s revenues. Finally, some scholars have concluded that raising more revenues from income tax instead of estate tax would enhance efficiency [[Holtz-Eakin, Douglas, and Donald Marples. “Distortion Costs of Taxing Wealth Accumulation: Income vs. Estate Taxes.” NBER Working Paper No. 8261. Cambridge, MA: National Bureau of Economic Research, 2001.]].

The bottom line is, even if we buy the opposition’s premise that the only important thing is governmental revenues (which we don’t, because of our value differences), the inheritance tax is a very lousy way of collecting these revenues.