Why We Need an Inheritance Tax

We don't want money to just sit around.

It's easy to run an extremely poor nation.  People are so busy worrying about getting enough to eat that they don't have time to think about politics.  That's why Tokugawa Ieyasu, the man who unified Japan, used to say that his most important policy was to tax the peasants so that they lived just above starvation and couldn't even think of rebelling.

It's more difficult to run a nation as people become wealthier.  Experience in Asia shows that when the national economy increases to somewhere between US $1,500 - 2,500 per person per year, people stop worrying about getting enough to eat and become interested in politics.  This has sometimes been called the "revolution of rising expectations" - as people start to become better off, their wants grow very fast and become hard to satisfy.

This is where a common national vision and national institutions become important.  For many years, the American dream has been that anyone can become rich if he's smart enough and works hard enough.  It helps to be lucky, of course.  Mr. Gates is a very intelligent man who has worked very hard, but he got his start selling an operating system to IBM. Having his mother on the board of IBM was a stroke of luck.  But the American Dream is realistic enough that people don't get jealous of Mr. Gates.  They want to imitate him by earning fortunes of their own, they don't want to tax him out of existence.  This attitude of wanting to earn your own money leads to economic growth which benefits us all.

Unfortunately, brains and hard work are not enough to fulfill the American dream, we also need court systems which force powerful people to treat weaker people fairly.  Powerful businesses don't like smaller businesses taking away their customers.  In countries which don't have good justice systems, powerful people squash competitors through government connections instead of by competing on quality or price.  This hurts consumers, but the people who're already established in business don't care when their actions keep other people poor.

Our court system isn't perfect, and our legal system favors those who have the most money, of course, but a new business can compete with an established business without the owner getting beat up or put in jail.

Most African and Latin American countries lack reliable court systems, so businesses rely on government connections for protection.  This makes it hard for new businesses to compete, so prices stay high.

Weak courts hold back economic development, but inheritance tax is another institution which is extremely important for economic development.  Without a inheritance tax to recycle money, there's no reason for heirs to work hard.  They can sit on their trust funds, cash the checks, and never invest in anything that will lead to economic growth.

Over time, this leads to a concentrated economy which doesn't grow much.  In Guatemala, for example, 1% of the population owns maybe 90% of the economy.  The people on top are doing fine, there's no reason to try anything new.  Without inheritance taxes, their kids won't have to work either.  We see the same thing in Mexico.  The richest man in Mexico bought the telephone company years ago and has used government connections and court proceedings to maintain a telephone monopoly.  This has kept prices high, which cuts economic growth.  There are so few opportunities in Mexico that Mexicans with initiative leave for the US where it's easier to make money.

Until now, the US has been different.  With inheritance tax to recycle the money, the only way a family could stay powerful over a long time was for each generation to find a new way to make more money.  Take the du Pont family as an example.  Eleuthère Irénée founded the DuPont company in 1800.  According to the Wikipedia, the family managed the company well into the 20th century and still owns major parts of the company.  There are around 2,000 family members, but they aren't regarded as highly wealthy.  What would have happened if there had been no inheritance tax?  Without the family having to earn money to keep up their lifestyle, Du Pont would probably not have grown as much as it did and would not have contributed to the US economy as it has - yet the du Pont family members would still be hugely rich, far more so than they actually are.

If you need additional evidence that people sit on money when they can, consider charitable foundations.  Partly to avoid inheritance taxes, rich men like Andrew Carnegie and JD Rockefeller started a tradition of giving money to foundations who were supposed to make society better in various ways.  Over time, foundations sat on so much wealth that the government found it necessary to pass laws insisting that foundations spend a certain percentage of their endowment each year.  In order for the foundation to keep going, each generation of foundation leadership must make enough money to cover the spending requirements laid out in the law.

This law has the same effect as inheritance taxes, it makes it impossible to just sit on money.

People claim that inheritance taxes tax money which has already been taxed once.  That's true, but so what?  If charitable foundations can't be trusted to recycle money to benefit society without a law requiring them to spend a certain percentage every year, how can we trust rich families to recycle their wealth?  The answer's simple - we can't.  We need an inheritance tax to periodically level the playing field so that new businesses can continue to grow our economy.

Without inheritance taxes, we'll eventually end up like Guatemala, with a few families owning everything.

Will Offensicht is a staff writer for Scragged.com and an internationally published author by a different name.  Read other Scragged.com articles by Will Offensicht or other articles on Economics.
Reader Comments

I don't think any tax is needed to keep competition running.  Big, dumb legacies tend to cannibalize themselves over time if they don't innovate.  And the Japan model is an unfair analogy because their justice system OVERTLY favors the wealthy - so much so that the bureaucrats' salaries are calculated with bribes figured in.  It is assumed that the rich will buy whatever justice they need.  The US does not have that problem.  Also, unless you have a monstrous inheritance tax (well over 95%) and cover all your bases, the rich will still be rich and buy what they want no matter.  In order to clean house when people die, the government would have to steal it all.

Particularly in the last 30 years, you can see an abundance of small companies springing up NOT because of the elimination of big companies, but because old, rich companies are stagnant and the little guys are cashing in with new gizmos.  Plus, there are very few old, rich companies that are run by any single family or person past two generation cycles.  And there is no inheritance tax on businesses.

There are other problems...  If not taxed, where would all that inheritance money go?  Back into the economy.  Even sitting in banks and collecting interest, it is better for the US economy than if Uncle Sam steals it.  Sitting inheritance money greases the banking skids for loans which creates jobs.

As long as the courts stay out corporations' pockets, there is no harm in wealth piling up.  Maybe for specific youngsters that grow up dumb and privileged, but they tend to weed themselves out of the system pretty fast.

September 6, 2007 11:52 AM

"And the Japan model is an unfair analogy because their justice system OVERTLY favors the wealthy - so much so that the bureaucrats' salaries are calculated with bribes figured in."

I doubt this very much.  According to Transparency International, in 2006 Japan ranked #18 in the world for least corrupt, above (that is, less corrupt than) France, Belgium, and the United States.

September 6, 2007 1:49 PM

Of course.  Oriental countries do not see that as corruption.  For awhile in Hongkong, there were paper manuals published that explained the bribe levels to the people.  You go to the DMV, what does the clerk expect if you want to get out in 15 minutes or less.

Does the average Japanese person view bribes as corruption?

September 6, 2007 2:36 PM

"Without a inheritance tax to recycle money, there's no reason for heirs to work hard.  They can sit on their trust funds, cash the checks, and never invest in anything that will lead to economic growth."

Aren't trust funds investments?  Those *do* lead to economic growth...So what if a few rich kids are too dumb to work?  Using taxes to get things done isn't exactly the best way to go about things.  The government doesn't need any more money than it already steals.

September 7, 2007 4:39 PM

Except for Lobbyists and Politicians, few people would dispute that special interests channel large sums of money to high profile candidates, in exchange for favorable legislation. Often the legislation special interests paid for are voted into law but overturned by the courts. As a result, corporate donations to judicial candidates are growing rapidly. Although it is not widely reported, purchasing judicial loyalty through corporate campaign donations is as big a problem as corporate influence in higher profile elections.

September 10, 2007 9:36 AM
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