The Logic behind Estate Tax

Labeled the ”death” tax by its opponents, the estate tax is a tax that is imposed on the transfer of “taxable estate” of any deceased person, regardless of whether the property is transferred via a will or according to state laws. Transfers to a spouse or to some charitable organization are usually exempted from being taxed and the tax affects only estates of considerable size ($3,5 million USD; $7 million USD for couples).

The logic behind the estate tax
The arguments in favor of the estate tax take a few different forms. The three most common arguments are that the tax prevents the perpetuation of wealth, that it increases the incentives people have to work and that it ensures that the federal budget gets funding. All of these arguments are related, and a fourth argument, the philosophical question of whether someone has any right to wealth produced by another person, is also related to the other three arguments.

1. The estate tax prevents the perpetuation of wealth
Without the estate tax, wealth would – to a higher degree than today – pass through family generations. Research has shown that when people inherit money, they become more likely to leave the labor market and become unproductive. The estate tax thus ensures that more people remain productive than if the estate tax had not existed. This is good economically because it ensures that the government receives tax payments and it also ensures that overall productivity increases.

2. The estate tax increases the incentives people have to work
By ensuring that people do not simply rely on inherited money, the estate tax serves to uphold innovation since families that inherit fortunes retain incentives to invest money to ensure that wealth is upheld. Families that inherit fortunes are often in a position to invest and the estate tax can therefore contribute to a higher degree of job creation in the economy.

3. The estate tax ensures that the federal budget gets funding
While both the estate tax and income taxes contribute to federal funding, the estate tax differs from the income tax since the former is not directly an incentive against innovation and work. The estate tax does not tax money the earner spends, and thus does not reduce one’s incentive to work (hard), while nevertheless upholding the incentives to work.

4. The estate tax upholds the moral view that people do not have the right to wealth accumulated by someone else
Although arguments can be made against the estate tax, there are multiple moral questions that concern whether a person can actually have a legitimate, moral right to inherit what another person creates. In historical terms, inheritance is both common and uncommon, with many cultures sacrificing whatever wealth one accumulated and other cultures passing down those same values. By retaining the estate tax, society upholds a part of both these historical tendencies and ensures that some, but not all, wealth passes to the next generation.

Estate tax in the United States. Retrieved November 25, 2010-11-25