Quotulatiousness

April 30, 2014

Inheritance taxes actually perpetuate the 1%

Filed under: Britain, Economics, USA — Tags: , , , — Nicholas Russon @ 08:18

Here’s Tim Worstall’s counter-intuitive post at the Adam Smith Institute blog from last week:

… Note “family foundation” there. Because of that inheritance tax rich people do tend to (and they have to be very rich for it to work) stick all of the money into a foundation. This wealth can then be maintained by professional money managers down the generations. Tax free, of course, as it’s inside a foundation. The stipulation is that said foundation must give away 5% of its assets each year. But such “giving away” obviously includes employing family members to run it. At pretty much any salary desired.

This obviously wouldn’t happen if the money could just be left directly to children without tax being due. And the effect of it going into such a foundation where the professional money managers can maintain it, rather than the heirs blow it, is that we’ve lost one of the major forces that disperses wealth through the society. The feckless heir.

So, we end up with the imposition of the tax leading to the continued concentration of old wealth, as the avoidance of the tax reduces the ability of the inheritors to waste it.

As an example, who thinks that any of the Kennedys would still be rich if they’d been able to get their hands on old Joe’s money directly?

I rest my case.

As one of the comments on that post points out, it’s not just the inheritance tax: it’s the interaction between the tax and the rules governing family foundations that create this unexpected-to-most-of-the-99% situation. I’m sure the 1% who can benefit from this are fully aware of it. This could be fixed either way, but the very people who benefit are the ones who would be pivotal in whether the changes could be made. So, it’s technically possible but not at all likely.

2 Comments

  1. Inheritance taxes are a blight that governments invented to steal more money from the earners. It is sad that the assets that a person has earned through the years, aquired with money that has already been through the tax mill, gets taxed again as it is passed to the next generation. Of course this keeps many lawyers and accountants in business, and isn’t that really what this seems to be about. The people who make the rules (typically rich lawyers and their ilk) setting up rules that they can curcumvent.

    If I was king I would put most of them out of business with a simple flat tax, no incentives or grants, only a lower income reduction. All people would pay an equal portion on money earned, regardless of investment income, savings income, or earned income. The first $20,000 would be exempt, and the rest would be taxed a a flat rate that is required to meet spending obligations. Of course we would have to stop handing out tax money in the form of grants to every moocher and begger, including all business welfare cases, but small price to pay to simplify the system. And of course, it would be a fair system where everyone pays the same freight. With the reform, I would put the same system in place on businesses as well, with an exemption, at a similar rate as normal taxpayers. And then I would abolish all other deductions, incentives, and grants to business as well. The well worn “business lunch” would be relegated to history, we all have to eat, why should the government subsidize that? Businesses require phones, cars, gas, housing and office space, why would that not be factored into the cost of doing business, and therefore no subsidy or deductions required. Equipment gets old, replace it, no deductions for depretiation of goods. You get the picture. With this simplified system we have eliminated all of the specialized tax avoidance accountants and lawyers specialized in business law, as the tax law would be simple – Earn money, pay tax at x% rate. The rate would not change, no progressive crap for me, it would maintain a fair and equitable percentage.

    Anyway, I am sure it isn’t realistic to dream of, too many lawyers and accountants in politics to allow that to happen.

    Comment by Dwayne — April 30, 2014 @ 09:37

  2. Inheritance taxes are a good example of a government measure to discourage a certain course of action that actually end up encouraging that same thing. If you view the government as “owning” the country, then you have no particular objection to the same dollar being taxed multiple times, while if you view the government as merely the “steward” of the country, this is just legalized robbery. As the early Libertarian Party/anarchist slogan had is “Tax is Theft”.

    Personally, I don’t go that far — I think there’s a role for government (national defence, police, courts, etc.), but it’s a much smaller role than they’re currently playing.

    Flat tax proposals always do well initially: it sounds fair because it is more fair than the current taxation system. Where they always falter is when someone points out that wealthier people will end up paying less than they (theoretically) do under the current system. In practice, the tax code is riddled with ways for the very wealthy to minimize the actual tax bite in ways that are just not available to the average person. And that is one of the reasons why simplifying the tax system would be a very difficult task politically — a lot of very wealthy and very well-connected folks would fight tooth and nail to keep their particular loopholes in place.

    Comment by Nicholas — May 2, 2014 @ 07:46

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