Don't tax death
By Scott Sumner
Here’s the Economist magazine, in an article advocating death taxes:
Advocates of the tax were unable to counter with anything nearly as powerful. A few pointed out that double taxation occurs on a daily basis in the form of sales taxes (people buy things with taxed income), or that it is what the person leaves behind, rather than the person, which is subject to the estate tax.
I understand the impulse that leads people to favor inheritance taxes. But death taxes are not the way to go about it. When economists complain about “double taxation”, they have something very specific in mind—taxing future consumption at a higher rate than current consumption. Combining a sales tax with an income tax does not lead to the double taxation of future consumption. However an income tax alone, indeed any tax on capital income, does lead to the double taxation of future consumption.
Death taxes are not bad because a bunch of old rich people have to pay money to the government, rather they are bad because thrifty rich people are taxed at a much higher rate than profligate rich people. I have no problem with progressive taxes, which tax high rates of consumption more heavily than low rates of consumption. I do have a problem with taxing future consumption at a higher rate than current consumption.
Sweden, which is usually seen as egalitarian, has gone one step further. In 2004 its inheritance tax was repealed, with the support of a former communist party, among others. What prompted such a radical transformation from the 1960s, when the largest estates could face an effective tax rate of 60%? By the end of the 1970s there was a growing sense that the Swedish state was bloated; a turning-point came when Astrid Lindgren, the creator of Pippi Longstocking and a national hero, revealed that she faced marginal tax rates of more than 100%. A financial crisis in the early 1990s reinforced the sense that the country needed to become more competitive.
Politicians noted the special disgust that Swedes reserved for inheritance tax. According to Swedish Enterprise, a lobby group, entrepreneurs such as Ingvar Kamprad, the founder of IKEA, were leaving the country to avoid high taxes. Stories abounded of family firms broken up to pay the bill. At first, tweaks were introduced to the Swedish system. Yet the resulting complexity met with disapproval. Sweden is a small country with high levels of social trust; people are allergic to bureaucracy, says Janerik Larsson of Timbro, a think-tank. “It was easier to get rid of it entirely.” After abolition Mr Kamprad returned to Sweden. The economy has grown quickly in recent years, and anti-tax advocates claim they have been vindicated.
Sweden is not just “usually seen as egalitarian”, it is fairly egalitarian. And the Swedish case shows that there is nothing inconsistent with abolishing the inheritance tax and being an egalitarian country.