Opinion

Why a 100 Percent Inheritance Tax is a Silly Idea

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Posted: Aug 29, 2017 12:01 AM
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Why a 100 Percent Inheritance Tax is a Silly Idea

Editor's Note: This column was written by Martin van Staden.

The inheritance tax gives a whole new meaning to the saying that only two things in life are certain: death and taxes. Turns out, not even death can liberate people from the state’s thirst for the hard-earned wealth of others. The idea of a 100 percent inheritance tax takes this to a whole new level.

Abi Wilkinson writes for The Guardian that a 100 percent inheritance tax might be worth considering in pursuit of “social progress.” Essentially, according to Wilkinson, social justice is more important than the moral right of the dead to have their wishes respected. Wilkinson also believes that the onus should be on the deceased and their beneficiaries to justify the inheritance, rather than on the state to justify taking all the wealth when the deceased passes away.

Arguing for substantial inheritance taxes is nothing new. Dan Matthews argued, similar to Wilkinson, for a 100 percent tax for Forbes back in 2014, and Professor Allan Brawley of Arizona State University called for a tax of up to 70 percent on “multibillion-dollar estates” in 2012 for Huffington Post.

The notion of a 100 percent inheritance tax is, however, a contradiction in terms. If the tax amounts to 100 percent of the estate, then the heir is left with nothing, and, consequently, does not inherit. This is more properly called a death tax, and, moreover, should not even be considered a tax, but a total expropriation of wealth without compensation.

It should be evident why an inheritance tax is a bad idea––it, like all other taxes, fiddles with market incentives.

You won’t necessarily be less productive if you can’t leave any money to beneficiaries, because, as Wilkinson rightly notes, self-interest is a strong motivator while you are still alive. However,  you will be strongly incentivized to ensure all your money is spent or in a tax haven before you die.

Rather than ensuring we have enough saved up for our retirement, this tax will lead us to try and spend all our money––recklessly, if need be––in our last years. Alternatively, as we grow older, we will start giving all of our wealth to our descendants, potentially well before we die. While this is not necessarily a bad thing, it could certainly doom the elderly to easily avoidable destitution and incentivize foolish financial planning.

A 100 percent inheritance tax anywhere will also turn literally everywhere else into a comparative tax haven. It should not surprise anyone that wealth will quickly flow out of societies that go down this route. The sick and elderly who are capable will ensure that none of their wealth remains where the 100 percent inheritance tax applies, as the idea of their intended beneficiaries keeping some of the wealth will always outweigh them getting none of the wealth. As a consequence, any state, which adopts a 100 percent inheritance tax, would also need to implement strict foreign exchange and capital outflow controls, which, in turn, further strangle the economy and discourage foreign as well as domestic investment. 

These kinds of draconian inheritance taxes are usually justified by arguing that the beneficiary has no moral claim to the wealth they stand to inherit––they don’t deserve it. They never worked for it, and are simply receiving it for usually being related to the deceased. In fact, Wilkinson writes that inheritance is “money that no living being has a moral claim to.”

This argument is flawed, in that those who support the tax assume anyone other than the deceased can decide who does and who does not deserve to inherit their (the deceased’s) wealth.

If, while I am alive, I am allowed to give my wealth to someone else, why do they suddenly not deserve it when I have passed away? As the owner of my wealth, I should be able to determine the beneficiary.

Wilkinson also makes an erroneous assumption when writing that most people now agree on the redistributive justification of taxation––transferring money from the wealthy to the poor. Wilkinson provides no substantiation for this claim. While taxation is certainly a widely accepted institution, that people see it as a tool to reduce wealth inequality rather than merely as a funding mechanism for social services, remains to be seen.

In fact, Wilkinson laments the fact that the majority of British citizens oppose the inheritance tax, writing, “instinct seems to override common sense.”

On the contrary, it is the notion of a 100 percent inheritance tax, which is incompatible with common sense. The British are being rational in their opposition to this tax. Other than potentially turning the sick and elderly into prodigals, such a tax is morally repugnant in assuming that the state is entitled to the hard-earned wealth of the deceased, against their explicit wishes.

Martin van Staden is Legal Researcher at the Free Market Foundation of South Africa and the Academic Programs Director of Students For Liberty in Southern Africa. He has a law degree from the University of Pretoria and is a Young Voices Advocate.