Does Paris Hilton Really Deserve Millions Tax-free? Let’s Tax Heirs, Not Estates

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For progressives like myself, the Institute for Policy Studies’ finding that twenty Americans own more wealth than half the population presents a frustrating puzzle.  Economic inequality has become such a hot topic that even Ted Cruz and Rand Paul have complained about it; given that half of those twenty inherited the bulk of their wealth, one might think there would be broad support for the estate tax, which currently affects only the wealthiest 0.2% of Americans and is anticipated to raise $246 billion in much-needed revenue over the next decade.  At a time when 69% of respondents polled say that government should act “to reduce the gap between the rich and everyone else,” how can we explain the vampire-like resilience of efforts to eliminate the only tax explicitly targeted at the very richest Americans?

One answer is that Congress is more responsive to wealthy constituents than to the general public.  It is a commonplace of politics that a motivated minority can be more effective than a passive majority: politicians in favor of eliminating the tax find it easy to raise campaign contributions from families like the Walmart heirs (four of those richest twenty Americans!), who stand to save tens of billions of dollars.  No equivalent constituency exists to fund the other side.

But there’s an even more basic problem: Americans really don’t like estate taxes.  Surveys consistently show high levels of support for their elimination — 82% of those expressing an opinion in one 2002 survey. In a 2009 survey, it was rated as the least fair federal tax.

Progressives tend to believe opposition can be overcome with education.  It’s true that Americans have severe misconceptions about estate taxes.  In a 2006 study, 49% of respondents thought that the estate tax affects “most families” (the correct answer is less than 2 in 1000), explaining why Republicans can continue to claim that estate taxes destroy small family farms despite failing to identify a single example   Indeed, a recent study found that giving people information about the actual incidence of estate taxes increased support from 17% to 53% of respondents. 

But if well-informed participants were merely evenly split on the issue, defenders of the estate tax should rethink how to defeat the determined opposition of a powerful few.  I propose a fundamental shift in strategy: replace the estate tax with a “private welfare tax” which treats gifts and bequests as unearned income to be taxed on the recipient’s regular income tax return.  

Why would this attract broader support?  Consider the dramatic change in attitudes toward same-sex marriage, supported by less than a third of Americans in 2004 but by over two-thirds in 2015.  While some observers attribute this dramatic shift to education in the form of gay friends and relatives, I believe an equally important factor was that the movement promoted a simple but powerful moral argument well attuned to America’s libertarian streak: the right to be left alone when your actions don’t harm anyone else.

I’m not sure progressives appreciate the similarly simple but powerful moral argument underlying opposition to estate taxes:  Americans view success and thrift as virtues and dislike the idea of a tax which penalizes people who choose to save rather than spend.  While liberals might find it annoying, it is not inaccurate to call it a death tax. 

To be sure, there are moral counter-arguments:  Americans dislike the idea of a hereditary aristocracy and estate taxes add needed progressivity to the tax system. But these arguments are less visceral and thus less effective.

With my proposed tax, by contrast, the moral focus is on the recipient, not the giver.  Why shouldn’t rich kids pay at least as high a tax on money they get for doing nothing as middle-class Americans pay on money they work for?  Exemptions for small amounts would exclude the $20 Grandma includes with your birthday card, but heirs and heiresses receiving millions would have to share their windfall with the public. 

Moreover, like “sin taxes” aimed at dissuading people from smoking or drinking, this tax penalizes behavior which many think isn’t good for you anyway.  After all, new House Speaker Paul Ryan famously warned that public welfare “lullls able-bodied people into complacency and dependence [and] drains them of their will and their incentive to make the most of their lives.”  Don’t the children of rich people deserve protection from the same dangers?

Because that’s what inheritances are, in the end: private welfare. Personally, I am less worried than Congressman Ryan about the danger that a robust social safety net will lead to complacency and dependence among working class Americans.  But as a wealthy father of two, I hope to follow the advice offered by Warren Buffett: to give my children enough that they can do anything, but not so much that they can do nothing.  And I think it perfectly reasonable that when I provide private welfare for my own children, they pay taxes to help ensure that other, less fortunate kids also have a fair shot at the American dream.

Eric Schoenberg
Chairman of the Board, CampusWorks, Inc.
Adjunct Assoc. Professor, Wharton School
Patriotic Millionaire

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