Are Death Taxes on the "Rich" Bad for the "Poor"?

Professor Steven Landsburg of the University of Rochester recently published an op-ed in the Wall Street Journal asserting that the estate tax actually hurts the poor.  (How the Death Tax Hurts the Poor, Oct. 29, 2011).  If he is right, it would be a great reason to do away with the estate tax, since the only reason that tax exists is to divest the well-to-do of the right to pass their life savings on to their children, ostensibly for the benefit of the less well-to-do.  It does not exist to raise revenue, as every year it raises a minuscule sum.  See Congressional Budget Office, Economic and Budget Issue Brief, "Federal Estate and Gift Taxes" (Dec. 18, 2009) ("Federal transfer taxes have historically made up a relatively small share of total federal revenues—accounting for 1 percent to 2 percent of total revenues in most of the past 60 years.").  If it actually hurts the poor,* there is no reason it should exist.


Professor Landsburg's theory is that the death tax hurts the poor by encouraging "the rich" to spend their money instead of saving it, since any savings will only be taxed at punitive rates upon death, and by spending their wealth the rich deprive others of material goods:

The death tax sends a powerful message to rich people: "You can't leave everything to your heirs, so spend now, before it's too late. Burn more fuel. Demand more timber for your mansions, more steel for your private planes, and more fiberglass for your yachts.'' 

Then all those resources—the fuel and timber, the steel and fiberglass—become unavailable to build factories, so the rest of us get worse jobs at lower wages. Those resources are unavailable to build farm equipment, so we all pay higher food prices. They're unavailable to build roads and schools and hospitals. 

I don't begrudge anyone the fruits of his labor. But the death tax encourages people to pick extra fruit, leaving the trees a little barer for the rest of us.

Putting aside that Professor Landsburg apparently does not know what airplanes are made of (lots of aluminum, titanium and/or carbon fiber; relatively little steel), he seems to me to be completely right in his thesis, but completely wrong in his theory. In other words, Professor Landsburg is right that the death tax hurts the poor; but not for the reasons he puts forth.  



Professor Landsburg's theory that consumption by the "rich" leaves less for "the rest of us" is simply a variation on the same false claim that people can get wealthy only by taking wealth away from others.  As I have explained, buying goods and services makes the purchaser and the seller better off, and people by and large can get wealthy only by making others wealthier, too.  Unless they are stealing, people don't get wealthy by taking wealth from others.  So when Professor Landsburg asserts that when the rich spend money on timber for mansions (perhaps he means lumber), steel for private planes and fiberglass for yachts, they are "leaving the trees a little barer for the rest of us," he incorrectly asserts that trade destroys wealth.  He incorrectly asserts, in other words, that when the rich spend they leave less for the rest of us than they take. To the contrary, the house builders, airplane mechanics and shipbuilders who build and supply the houses, planes and yachts the rich supposedly buy, and those who provide services the rich hire, of course make money and are better off as a consequence of that spending. 


But Professor Landsburg is further wrong in his supposition that spending by the rich leaves fewer goods for "the rest of us" to buy.  The premise of his argument is that consumption by the rich leaves less for others to consume.  Yet however many mansions, planes and yachts the rich are buying, they cannot be consuming so much in raw material that there is appreciably less left for the rest of us.  There just are not that many of them snapping up all the steel in the world for their (ahem) planes to leave nothing for the rest of us to build our cars, or even enough to have a material effect on the market price for steel.  The demand in China for steel (the world's largest consumer)--that might affect prices.  But they build hardly any private planes in China.


Finally, Professor Landsburg is wrong to suggest that the death tax promotes spending by the rich in the first place.  Contrary to Professor Landsburg's surmise, those who have built up an estate that would be hit by the death tax do not spend it down on the expectation that, if they fail to spend it, it will just be taxed. After all, that tactic entails the unacceptable risk of spending too much, leaving nothing for perhaps many years of life yet to live. Spending to cheat the tax man without taking that risk would require near-omniscience regarding how much time one has until death, then metering one's spending until then. In reality, of course, no one knows the day nor the hour, so those with a taxable estate have every incentive to spend cautiously, to make sure their wealth lasts as long as they do.  The death tax consumes a large chunk of whatever is left, so if those with a taxable estate are interested in leaving anything to their offspring, they will spend even less, so that their estate, after tax, is larger.  Thus, the death tax does not promote spending by "the rich," but if anything discourages it. 


And therein lies my basis for concluding that the death tax hurts the poor.  It is a triple-whammy wealth destroyer, making all of us, especially the least wealthy among us, poorer.  First, as just shown, it may discourage spending by those with wealth, spending that would create wealth through economic transactions that make both sides better off than they were absent the transactions.  Second, it discourages investment in and development of small businesses, which often are family-owned and intended to be passed from generation to generation, and which are the largest job-creators in the economy, by punitive taxation of the business at death.  Third, it is bald wealth redistribution, taking wealth from some who have "more," ostensibly to give to others with "less," an involuntary transaction that destroys wealth just as surely as stealing. 


Thus, the death tax discourages wealth creation, hampers wealth expansion and fosters wealth destruction.  It takes wealth built up by work, invention, investment and trade, and destroys it, just as surely as if setting it on fire and letting it burn.  All of us are hurt when wealth is destroyed, especially the poor who most could benefit by the better jobs, greater employment and greater standard of living made possible when society promotes wealth maximization. For these reasons, and not Professor Landsburg's, the death tax should be abolished.






*Note: I use the term "the poor" here because that's the term Prof. Landsburg uses.  As with "the rich," I do not believe there exists a permanent class of persons in the United States whom we can classify based on their wealth (in this case, limited wealth).  We do not have classes like that in America, and instead we have incredible social and economic mobility.  People who have little wealth at one time may become very wealthy later in life, and vice versa.  Given that people's status is changeable, and constantly changing, it makes no sense to call anyone "the rich" or "the poor."  Rather, as I have said elsewhere, these are labels the Left uses to foment class antagonism, and therefore they should be rejected out of hand.