April 20, 2005
Tax inheritances as income?
Jane Galt proposes a marvellously Gordian alternative to taxing decedents' estates: tax inheritances (and presumably other gifts above some exempt amount) as ordinary income to the recipient.
That avoids the problem of creating a new set of rules for inheritance taxation to replace the estate tax, and makes clear the logic of the case: people who have their money handed to them shouldn't be treated more favorably by the taxman than people who go out and earn it.
Hat tip: Tyler Cowen.
Updates
1. Stuart Levine of Taxbiz points out that the proposal I endorsed (and Matt Yglesias agreed to) isn't quite the one Jane Galt made: her proposal was to tax only cash as income, and to assign a tax basis of zero to other property, taxing it only when sold. As Stuart points out, that has fairly bad distributional consequences compared to the current estate tax.
2. Max Sawicky can't understand why anyone could favor inheritance taxation over estate taxation, since, he says, they're fully equivalent.
Actually, they aren't, quite. Under an estate tax, an estate of a given size pays the same tax no matter how many ways it's broken up, while under an inheritance tax the tax depends on the tax brackets of the recipients. Under the current tax, someone who dies with $1 millon and leaves it to an only child escapes taxation entirely, while the ten heirs of someone who dies with $10 million see nearly half of it go to the IRS. Thus inheritance taxation would encourage the breaking-up of concentrations of wealth, which I count as a benefit.
More to the point, the argument that "making death a taxable event" is wrong has some emotional/political force, by concentrating attention on whether we're treating the decedent fairly. An inheritance tax directs attention at the recipient of unearned wealth.
It's harder to justify taking money from my father, who worked and saved all his life, than from me and my sister, who did nothing to earn the money he left us except enjoy a lucky draw in the choice of parents. Yes, it comes to the same thing in economic terms, but politically it has a very different charge.
3. Dan Simon of I Could Be Wrong reminds me in an email that he got there first.
