Taxing Wealth Swedish Style
An annual levy that is more efficient than the estate tax.
This article is from the September/October 2005 issue of Dollars and Sense: The Magazine of Economic Justice available at http://www.dollarsandsense.org
This article is from the September/October 2005 issue of Dollars & Sense magazine.
at a discount.
Till Death Do Us Part
Karl Marx must be rolling in his grave: Russia eliminated its inheritance tax last month. Its move comes after January's decision by the government of Sweden, the birthplace of the modern-day welfare state, to eliminate its estate tax. Like the Russians, the Swedes have come to believe that the tax is unjust and economically counterproductive. Russia and Sweden join Argentina, Australia, Canada, India, Mexico and Switzerland as nations that don't make death a taxable event.
The U.S. now has the distinction of imposing the most onerous death tax in the industrialized world. The federal estate-tax rate is 45% on every dollar above a $1.5 million exemption, but in many states the combined federal/state tax on dying rises above 50%. This means that the government can snatch a larger share of the business, home and savings that a citizen builds up over a lifetime than would go to his heirs. If this sounds, well, a bit communistic, it is. The third policy plank of Marx's "Communist Manifesto" is "taxation of all inheritance."
Here at home, Mr. Bush is
straining mightily to round up just eight of 44 Democratic Senators to
permanently liberate America from this confiscatory tax when repeal comes up
for a vote later this month. Let's hope they can muster at least as much
faith in capitalist incentives as Europe's former Marxists.
--Wall Street Journal editorial, July 8, 2005
Economist Larry Summers, former U.S. Treasury Secretary, once wrote that "in terms of substantive arguments, this estate tax argument [for repeal] is about as bad as gets," and that he couldn't see any case for cutting estate taxes other than "selfishness." Unfortunately, as the latest round of Wall Street Journal editorials shows, neither selfishness nor bogus arguments about why we should repeal the estate tax are in short supply.
True enough, Sweden and Russia have repealed their estate taxes, and the third plank of Marx's Communist Manifesto demands, "Abolition of all rights of inheritance." But the rest of what the Journal's editors have to say about estate taxes ranges from misleading to downright false.
First off, not only Karl Marx, but most great political economists have called for the heavy taxation of estates. No less a figure than John Stuart Mill, the leading political economist of mid-19th century British officialdom, called for the "limitation of the sum which any one person may acquire by gift or inheritance to the amount sufficient to constitute a moderate independence." John Maynard Keynes, the pre-eminent economist of the 20th century, advocated "heavy death duties." Even Andrew Carnegie, the predatory capitalist turned philanthropist, was an unabashed supporter of the estate tax. Carnegie held that "[o]f all forms of taxation, this [the estate tax] seems the wisest." Unlike the WSJ editors, Carnegie believed that "[t]he more society is organized around the preservation of wealth for those who already have it, rather than building new wealth, the more impoverished we will all be."
Second, neither Russia, an economic basket case, nor Sweden, with its social welfare state, are the editors' usual economic exemplars. But let's say they are right, at least about Sweden, and U.S. tax policy should become more like Sweden's. In that case, the United States would repeal the estate tax. But if death would "no longer be a taxable event," accumulating wealth would become a taxable event--annually. Unlike the United States, Sweden imposes a tax of 1.5% each year on the net worth of single-adult households in excess of 1.5 million kroner (or about $198,500), and above 3 million kroner for couples.
A direct tax on wealth, levied annually, is in fact more efficient than an estate tax, although I doubt that is what the Journal's editors have in mind when they call the estate tax inefficient. According to the calculations of Edward Wolff, an economist who studies the U.S. distribution of wealth, Sweden's wealth tax, levied here, would raise about 10 times as much revenue as the current U.S. estate tax. A Swedish-style direct wealth tax would also go a long way toward addressing worsening inequality in the United States, now so severe that the Journal itself has published a series of articles on the ever larger chasm between the rich and the rest of us. The equalizing effect of a Swedish-style wealth tax in the United States, again according to Wolff, would match that of the personal income tax, the only reliably progressive part of the U.S. tax code.
Beyond the wealth tax, the Swedish tax system as a whole collected revenues equal to 50.8% of the country's GDP in 2003. That's far more than the 24.2% of GDP the U.S. government collected; the United States has one of the lowest overall levels of taxation among advanced industrialized countries. In fact, tax revenues relative to size of the economy in the other industrialized countries the editors praise for having dropped an estate tax are also higher than those in the United States: 31.5% in Australia, 33.9% in Canada, and 39.8% in Switzerland (in 2003).
Finally, is the U.S. estate tax confiscatory? Hardly. At 47%, its top marginal rate is the second highest, but still well below Japan's top rate of 70%. But effective estate tax rates (as a percentage of the total value of an estate) are far lower. The Internal Revenue Service reported that the effective U.S. inheritance tax rate was just 18.8% in 2003--on the small number of estates that owe any tax at all. With the first $1.5 million exempted, combined with state tax payments and charitable bequests, the heirs of only 18,800 people, or less than 1% of the approximately 2.5 million people who will die this year, will pay any estate tax. On top of that, a recent study by the Congressional Budget Office found that had an exemption of $1.5 million been in place in 2000, only 300 family farm estates and 223 family-owned small businesses nationwide would have owed any estate tax at all, and all but 27 of the farms and 82 of the businesses had sufficient liquid assets (such as bank accounts, stocks, bonds, and insurance) in the estate to pay the tax without having to touch the farm or business itself. (The alleged loss of family farms and small family businesses is one of the primary arguments used by those who seek to abolish the estate tax.)
Now, if the Wall Street Journal would prefer to follow Sweden's example by taxing accumulated fortunes year in and year out in lieu of taxing estates only when they're inherited, we are all for it, especially if the revenues are dedicated to providing U.S. citizens with, say, the universal health insurance enjoyed by Swedes.
But, of course, that is not what the WSJ editors have in mind. Today the United States faces the worst inequality since the 1920s and a massive federal budget deficit. So why--even after the CBO has certified that the estate tax does little to hinder the transfer of family farms or small businesses from one generation to the next--do the editors want to repeal it, a move that would favor only the richest of taxpayers with an average income of $978,000? The answer, as Larry Summers suggests, can only be "selfishness."
Resources Carnegie, Andrew. 1889. The Gospel of Wealth. Available at <www.fordham.edu/halsall/mod/1889carnegie.html>; Keynes, John Maynard. 1964. The General Theory of Employment, Interest, and Money. NY: Harcourt. Available at <www.marxists.org/reference/subject/economics/keynes/general-theory/index.htm>; Marx, Karl. 1988. The Communist Manifesto. Frederic L. Bender, ed. NY: W.W. Norton; Mill, John Stuart. 1909. The Principles of Political Economy with some of their Applications to Social Philosophy. William J. Ashley, ed. London: Longmans. Available at <www.econlib.org/library/Mill/mlP.html>; Congressional Budget Office, "Effects of the Federal Estate Tax on Farms and Small Businesses," 7/05; M. Fiedler and J. Friedman, "CBO Finds Tiny Number of Farms Face Estate Tax," Center for Budget and Policy Priorities, 7/11/05; "Till Death Do Us Part," Wall Street Journal editorial, 7/8/05; Mortimer Zuckerman "So the Rich Get Richer?" US News and World Report, 5/2/05; Edward N. Wolff, Top Heavy: A Study of the Increasing Inequality of Wealth in America, Twentieth Century Fund, 1995.