Of all the tax cuts enacted during the Bush administration, none has been more controversial than repeal of the estate tax. Even though it represents only a very small part of the total revenue loss from the 2001 and 2003 tax bills -- and isn't really repealed, anyway, since it comes back in 2011 after disappearing for just one year -- left-wing activists have focused inordinate attention on the estate tax. They are still hoping to prevent its permanent repeal and are working overtime to fight the effort in Congress.
Advocates of estate taxation have made two important converts, who have given their campaign a lot of credibility and publicity. They are Bill Gates Sr., father of the Microsoft guy, and George Soros, a billionaire investor. Since the estate tax is supposedly a tax on great wealth, and since these two men are extremely wealthy, it gets peoples' attention when those who appear to be victims of the tax support it. It may make those with modest wealth feel guilty about supporting estate tax repeal.
In January, Soros had this to say: "The estate tax is the least damaging of all our taxation because it does not interfere with wealth creation. It increases social equality. It is so obvious estate taxation is a valuable taxation and we should keep it."
Of course, it is true that a tax cannot affect someone who is dead. But to say that the estate tax has no effect on the living is ludicrous. It has an enormous impact on the work incentives of the living, once they are past the point of providing for themselves in retirement. For those who is well-to-do late in their working lives, one can reasonably add the estate tax rate to the tax rates they already pay on income and capital gains. This raises their overall tax rate to virtually confiscatory levels.
Also, many studies have shown that estate taxes drain capital from small businesses, force them to pay heavily out of current earnings for life insurance to pay the tax, encourage the sale of family businesses to larger competitors and lead to other actions that may not be justified economically. That is why economists have long held that the estate tax is especially pernicious.
For example, Adam Smith: "All taxes upon the transference of property of every kind, so far as they diminish the capital value of that property, tend to diminish the funds destined for the maintenance of productive labor."
C.F. Bastable: "Succession duties first of all possess the grave economic fault of tending to fall on capital or accumulated wealth, rather than on income; they therefore may retard progress."
Joseph Schumpeter: "As long as an inheritance tax remains a true inheritance tax, it always involves a conversion of capital into income, hence an act of economic waste which is damaging to all."
Gates, on the other hand, seems mainly concerned about the impact of eliminating the estate tax on charitable giving. Although much charitable giving is made through estates, this is only because people want to make sure they have enough to retire on before giving their assets away, and because estate tax rates are higher than income tax rates, thus increasing the value of charitable deductions.
In any case, studies have shown that charitable giving is more a function of income than taxes. When incomes go up, so does charitable giving. The estate tax mainly affects the timing of giving, not the amount.
Lately, Gates has invoked the Bible to argue for the estate tax. "This notion that there's a God-given right to pass everything on to your kids, that's not in the commandments I've read," he recently said.
Actually, it is in the Bible. Proverbs 13:22 says, "A good man leaves an inheritance to his children's children." Numbers 36:8 says, "Every one of the people of Israel may possess the inheritance of his fathers." Ezekiel 46:18 says that the state has no right to interfere: "The prince shall not take any of the inheritance of the people, thrusting them out of their property."
However, the most emphatic repudiation of wealth redistribution appears in Luke 12:13, in which Jesus acknowledges the value of wealthy people to society as a whole: "The land of a rich man brought forth plentifully." Echoing Ezekiel, he said, "Man, who made me a judge or divider over you?" In other words, it is up to each individual to decide how to distribute his wealth -- in life or at death -- not the state. Taking the wealth of rich men by force is neither moral nor efficient.
Of course, Soros and Gates are entitled to their opinions and to do what they wish to do with their own wealth. But their views about estate taxation are without merit.