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The Estate Tax: Not Just Unfair

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7/27/00 4:45 p.m.
The Estate Tax: Not Just Unfair
It hurts all of us — not just heirs and heiresses.

By Gene Callahan, a columnist for LewRockwell.com

ictor A. Canto points out, in his NRO piece, "The Tax-Cutting Groundswell," that the majority of Americans find the estate tax unfair. It is heartening to hear, from the Gallup poll that Canto cites, that 60% of Americans favor eliminating the tax, even though only 17% feel it will benefit them to do so. The bad news in the poll is that most Americans don't understand how tax cuts that do not directly leave more money in their own family's pockets can still benefit them. Educating the public on this fact can only increase the groundswell.

No doubt the bulk of those who don't think they would benefit from an elimination of the estate tax are employees rather than business owners. What they fail to realize is that an improvement in their own salaries is only possible through an increasing accumulation of capital on the part of entrepreneurs. The reason the American worker earns more than his Filipino or Bolivian counterpart is that there is a greater amount of capital available per worker in the U.S. than in those other countries. When the government taxes this capital away, most of it goes toward current consumption, thereby lowering the amount of capital per worker and putting downward pressure on wages. (Of course, the constant flow of new capital from savings has the opposite effect, so that we can also say that wages are lower than they would otherwise be in the absence of high taxes.) The portion of taxes the government does invest in capital goods (such as roads) suffers from the lack of any yardstick by which to measure whether the investment was wise. It is not enough to say that people found the road useful. The question is whether it was more useful than any alternate employment of the same funds. Capital goods are scarce, and there are always more human wants than there are means with which to fulfill them.

When capital is in the hands of entrepreneurs, they are forced — by the market — into using it to satisfy the most urgent, as-yet-unsatisfied wants of the consumers. Those entrepreneurs who misjudge these wants and squander capital on less urgent projects suffer losses. If they do not learn from their mistakes, then soon enough they will have no more capital to invest. Those who are better able to estimate consumers' wants make profits, and are rewarded for their correct judgment with more capital. However, no such discipline constrains the government. Whether its projects were those most urgently needed or not, its next round of "venture capital" is guaranteed on April 15th.

It may be argued, quite correctly, that we have no reason to believe that the entrepreneur's heirs will be as skilled at business as the entrepreneur was. But, if they are not, they will find their stock of capital dwindling, as it flows to those who are better able to make use of it. The truly pernicious effect of the estate tax, however, is on the entrepreneur himself. Knowing that he cannot direct the post-mortem disposition of his accumulated wealth as he sees fit, he is likely, toward the end of his life, to begin consuming his capital rather than reinvesting it. This depletes society's capital stock, rendering all future generations less prosperous than they would otherwise have been. Of course, the wealth is his, and he has the right to spend it on lavish parties if he so wishes. But, from a societal point of view, it hardly makes sense to have a tax that encourages him to do so!

The fairness argument against the estate tax is sound and, as the result of the Gallup poll illustrates, convincing. But tax cutters have another weapon in their arsenal, which is the fact that it is also in the long-run interest of the "other" 83% of Americans to see this tax eliminated. We might as well hit 'em with both barrels. After all, the poll does show that 40% aren't convinced yet.

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