Tuesday, December 28, 2010

Estate taxes must be equal to be fair

Although estate taxes could be a good idea, today’s tax exemplifies the dangers of an unprincipled democracy that ignores the principle of equality before the law.

Defenders of the recent legislation proclaim that the estate tax exempts 99.8% of Americans. The non-partisan Tax Policy Center estimates that with the new $5 million exemption, only 3,600 estates (in a country of over 300 million people) will pay any tax in 2011.

Everybody wants government spending on purposes they approve of and wants “someone else” to pay for it. But historically we avoided pushing “tax someone else” to extremes because that would have contradicted another important thing that we value: equality before the law.

According to Jean Jacques Rousseau, legitimate government must express the “general will” in two different dimensions. Laws must be general rules (equality before the law) generally arrived at (democracy).

A rule equally applicable to everyone could be highly obnoxious to most people. Imagine a 90% flat rate income tax. But it is impossible to imagine such a tax getting majority support. Democracy protects us from this kind of thing.

But democracy by itself does not protect us enough. Remember the intolerable segregation “laws” in large parts of the U.S. just 50 years ago. These perfectly democratic “laws” did not apply equally to the entire population (and if they had so applied they would never have been enacted).

Rousseau was right: To be legitimate, government must both be democratic and guarantee equality before all laws.

Recent estate tax discussions reflect our increased willingness to ignore equality before the law when enacting taxes. Oregon voters recently approved a state income tax increase that supporters bragged would only affect the top 2% of the population. Arguments in Washington, D.C. in favor of raising taxes only on incomes greater than $250,000 a year showed this same willingness.

We have never decided whether the estate tax’s principal purpose is to help fund government or to prevent vast concentrations of private wealth from being transferred from one generation to another. Estates have never been a major source of revenue for the government, and we could avoid unequal transmission of unearned wealth without the unseemliness of the current tax.

We could enact a 100% estate tax applicable to all estates. Since the purpose is not to raise money for the government, all of the resulting money would go into a trust fund disbursed annually in equal amounts to every man, woman, and child subject to the jurisdiction of our government-----a “social dividend.” We would all be each other’s heirs, and inheritances would increase economic equality instead of reducing it.

To reduce administrative costs, a small deductible could be sheltered from the tax. To discourage evasion of this tax, gifts (above a small exemption) should be considered taxable income, as would dividends people receive from the trust fund.

Ideally all taxes would resemble property taxes, where the same rate applies to all property and the only issue is whether to raise the rate or to lower it. If estate and income taxes worked like this, a lot of the current wheeling and dealing in Salem and Washington, D.C. would be eliminated and government could concentrate on more important business.

This article ran in the Corvallis, Oregon Gazette-Times on December 28, 2010.

1 comment:

  1. Good one. I'm still not convinced that a mildly progressive income tax is more unfair than a flat one (since the utility of income isn't exactly proportional to its size-- though I think I'd prefer a flat tax just because it avoids fights over exactly how progressive to make it), but you make good points here. Democracies continue to be used to enforce unequal rules.

    Property taxes aren't universally flat. We pay a lower rate to Somerville because our property is our primary residence. And the discount for living in our property is not a flat percentage-- in fact as far as I can tell it is a constant amount. So what amounted to a pretty high discount, percentage wise, on our old condo will be a much smaller discount on our new, more expensive condo.


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