Class warriors on the left argue that the United States should be more like Sweden, and we agree: Senate Republicans should move forward with a plan to repeal the inheritance tax, which the House passed Thursday.
Sweden had an inheritance tax for 110 years, and though the rate was sometimes quite high, the tax never became an important source of revenue. In the United States, the hated death tax produces only a fraction of a percentage point of federal revenue, though it imposes very heavy costs on a small number of families and businesses. In Sweden, the tax provoked various kinds of investment-distortion and tax-avoidance behavior, as it has in the United States. And in Sweden as in the United States, the bloody-minded support for the tax on the left has never been a question of raising government revenue; instead, it is “primarily related to an ideology of redistribution” and the “ideological momentum of the Social Democrats,” as Sweden’s Research Institute of Industrial Economics put it.
That’s certainly the case with our own Social Democrats, who don’t even do voters the courtesy of putting “Social” in their name. Senator Debbie Stabenow (D., Mich.) complained that repealing the death tax would amount to “helping the wealthiest people in the country.” And of course it would help some wealthy families — notice she did not protest that it would hurt anybody. It is a strange philosophy indeed that faults members of Congress for desiring to help a group of Americans. But if the Democrats are in fact feeling bent out of shape by the ways in which some very wealthy families organize their bequests, they should buttonhole the nearest Kennedy and have a frank discussion about trust law.
The inheritance tax is deeply unpopular, even though a relatively small number of households — a few thousand, typically — pay it in any given year. It is unpopular for many excellent reasons: It constitutes a special burden on certain asset-rich, cash-poor businesses, notably farms and small businesses whose assets are mainly made up of real estate, which often must be broken up and sold off to pay the taxman. The inheritance tax discourages capital formation, encourages counterproductive tax-avoidance behavior (such as pulling money out of productive investments to distribute as $56,000 Christmas gifts, coming in just under the gift-tax threshold), punishes thrift and family financial discipline, and elevates narrow ideological concerns over both public policy and individual liberty. That’s a lot of damage to do in exchange for seventh-tenths of 1 percent of the federal tax haul — roughly the amount the federal government spends annually on the maintenance of vacant and abandoned buildings (if someone in Congress happens to be looking for a spending offset).
The Republican bill would repeal the inheritance tax in toto. It would also leave heirs not having to pay taxes on capital gains that accrued before they owned the assets. The instinct here is a good one — while we’re feeling cosmopolitan, we’ll take Switzerland’s tax-free capital gains along with Sweden’s tax-free inheritances — but reducing or repealing capital-gains taxes is something that should be done categorically rather than having a special category of untaxed financial assets, which is itself a distortionary measure. The more investment decisions are dominated by the tax code, the less productive our investment environment is. That said, this capital-gains issue need not hold up the imperative to kill the inheritance tax now.
Funny thing about the Democrats’ trust-funder rhetoric here: For wealthy Americans, inherited assets constitute a relatively small share of their holdings, about 15 percent; for middle-class Americans, the inherited share is in fact quite a bit higher. The number of very wealthy families that inherited their money is a mixed bag (Waltons and Hearsts), but a small one. Perhaps there are better ways to express social disapproval of Paris Hilton than by pillaging families that inherit a wheat farm or an office building from their parents or grandparents.