... in this week's Becker-Posner blog. Becker pulls no punches:
I believe taxes on estates should be permanently abolished since they do little to reduce income or wealth inequality, benefit a vast army of lawyers and accountants whose role is to find ways to cut taxes on the estates of the wealthy, create problems for some families with smaller businesses, and do not raise a lot of tax revenue...
Professor Becker makes it clear his main issue is that the estate tax is all distortion, little return.
... after the knowledge revolution took off toward the end of the 19th century, bequests of financial and material wealth have become less important in the overall economy. Instead, the most important way for parents to “bequeath” economic position is through the transmission of knowledge in the form of education, training, and other human capital. Such capital embodied in people now comprises over 70 per cent of all “wealth” in economically advanced nations, far more important than material capital.
In modern economies children of better educated, higher earning, and more able parents on the average receive greater training and schooling, better health, and are more encouraged to develop their talents than are children in other families. Primarily for these reasons, children of parents with greater human capital form an economic elite that tends to have better jobs, less unemployment, and higher earnings. But this elite circulates over generations, and there is no convincing evidence that the degree of circulation, the degree of social mobility across generations, has been falling during the last couple of decades.
This echoes the theme (referenced in Posner's post) of a David Wessel article appearing Friday's Wall Street Journal (page A1in the print version):
... the reality of mobility in America is more complicated than the myth. As the gap between rich and poor has widened since 1970, the odds that a child born in poverty will climb to wealth -- or a rich child will fall into the middle class -- remain stuck. Despite the spread of affirmative action, the expansion of community colleges and the other social change designed to give people of all classes a shot at success, Americans are no more or less likely to rise above, or fall below, their parents' economic class than they were 35 years ago...
Why aren't the escalators working better? Figuring out how parents pass along economic status, apart from the obvious but limited factor of financial bequests, is tough. But education appears to play an important role. In contrast to the 1970s, a college diploma is increasingly valuable in today's job market. The tendency of college grads to marry other college grads and send their children to better elementary and high schools and on to college gives their children a lasting edge.
One of Becker's contributions to the WSJ article:
Even the University of Chicago's Prof. Becker is changing his mind, reluctantly. "I do believe that it's still true if you come from a modest background it's easier to move ahead in the U.S. than elsewhere," he says, "but the more data we get that doesn't show that, the more we have to accept the conclusions."
Back to the blog, Becker makes a pleas for truly fundamental tax reform..
I believe a tax on consumption, perhaps a progressive one, instead of income and corporate taxes, should form the heart of the federal tax system. Suffice it to say that consumption taxes, unlike income taxes, do not distort savings decisions, a particularly important issue for the United States.
A general reliance on consumption taxes would, among other things, replace an estate tax by indirect taxes on inheritances. The tax on inheritances would be indirect because they would not be taxed when they are received, but only as they are spent. So if a family receives a large inheritance that raises their consumption several fold, the amount they would pay in consumption taxes would also increase several fold for as long as the family continues to consume at a much higher level.
... and getting to the root cause of income inequality:
The energy and political capital spent on supporting high estate taxes is better spent on trying to raise opportunities to children from poor families by improving their education, training, and health.
Posner, on the other hand, sees some advantages to an estate tax:
I agree with Becker that inheritance taxes are preferable to estate taxes and that consumption taxes are preferable to income taxes. However, I do not share his strong opposition to the federal estate tax.
First, he takes a shot at the New York Times, and agrees with Becker that the returns to the tax are small:
A recent article in the New York Times calls the estate tax “perfect” on the ground that it does not distort the allocation of resources because people can’t escape death... The estate tax is not nearly so “perfect” as a head tax, because contrary to the Times article it is easily avoidable, as a head tax is not. I emphasize “easily”; for that is the reason the problem with the estate tax is not, as it might seem to be, that it is a tax on savings and can thus be avoided only by consuming all one’s wealth before death and therefore is likely to distort people’s consumption decisions, which would make it an inefficient tax. People who have no bequest motive—that is, who are not interested in having a positive balance when they die—are not greatly affected by estate taxation because they already have every incentive to dissipate their wealth before they die. People who do have a bequest motive are not much affected by the estate tax either, because they can transfer their assets to their children or to other intended heirs before death, reserving the income from the assets for their lifetime (the equivalent of an annuity, which expires on the annuitant’s death, leaving nothing for distribution to heirs).
As a result of these incentives and opportunities, the estate tax does not generate much revenue for the government.
It collects some, however, and in Posner's view that is enough:
... I do not consider 1 percent of total federal tax revenues a trivial amount—and its distortionary effects are probably modest. Becker is correct that it is costly in effort expended by lawyers to minimize the impact of the tax on their clients (though he may exaggerate the cost by attributing the entire income of estate-planning lawyers to tax counseling, when even in the absence of estate taxation legal counseling would be required for the preparation of wills and other documents required for large estates). But in that respect, it is no different from the income tax. Were the estate tax abolished, the revenue it generates would have to be made up by some other tax, which is as likely to be as distortionary as the estate tax and would invite avoidance efforts by tax lawyers.
Still, like Becker, Professor Posner is not much convinced that the estate tax addresses any larger social agenda:
If lack of social mobility is a problem, nevertheless it is unlikely to be solved by trying to limit bequests, since wealthy people can transfer much of their wealth during their lifetime. To have an impact on the transmission of wealth across generations, therefore, a stiff tax on bequests would have to be complemented by a stiff tax on gifts, and “gift” would have to be broadly defined to include such things as paying $50,000 a year for tuition and expected donations at a fancy private school in New York City. And really stiff estate and gift taxation, even if feasible, would be undesirable because of the disincentive effect on the work effort of those people—and they are numerous—who, to a significant degree, are motivated to become rich by a desire to make their children and grandchildren better off than they would otherwise be.
As usual, the two short essays contain more nuggets of wisdom than transcribed here. Consider this a preview, and proceed to the main feature.
UPDATE: Russell Roberts responds to the WSJ article, and a related first-in-a-series piece in the New York Times. Michael Mandel takes up the mobility issue here, here, and here. That middle one references this post, from Brad Delong. The last one references Kevin Drum's take on the topic.