A Tax Raise We Can Believe In

(4/6/2009) - The budget deficit for 2009 will, for the first time, exceed a trillion dollars.  The Obama administration is projecting that 2009’s record will be surpassed in 2010. 

Money is, among other things, a claim on goods and services.  Borrowing massive amounts of money is in effect promising to perform services or produce goods in the future, which will result in collecting more taxes in the future. 

Obama justifies the current spending and the stimulus package in particular as necessary to keep the economy out of the ditch and get it to produce wealth at its capacity.  Without spending, the economy will sink further, which will mean less production and debts just as high.  And, he argues, if we invest in education, reducing health-care costs, and an ability to produce clean energy, we will set the stage for paying off the debts we are incurring now.

On these points I agree with Obama. 

I do not agree, however, with another of Obama’s propositions – that we should avoid raising taxes during times of economic distress.  Now, I wouldn’t advocate an across-the-board tax hike.  Raising taxes on America’s poorest (a category which I conveniently fall close to) is probably not desirable.

There is one tax, in particular, that we should raise that would have little effect on the economy while reducing the burden of debt on future taxpayers – the estate tax. 

The estate tax, known pejoratively by some as a “death tax,” is more technically a gift tax.  Under the current rules, if someone dies and passes on more than $3.5 million for individuals or $7 million for a couple, the government will tax anything above that amount at a 45% rate.  Obama has pledged to keep this rate, and prevent the complete phasing out of the estate tax as planned by Bush and the Republican congress earlier in the decade.

I don’t think this goes far enough.  At the end of Clinton’s presidency, the estate tax kicked in after $1 million at a rate of 55%.  Though I’d like to talk it over with a tax expert, my inclination would be to start the tax at about $500,000, but at a rate of 20%.  Then boost it up to 35% at $750,000, 50% at $1 million, 60% at $3 million, 80% at $10 million, and 90% for everything over $20 million (or something like that).  It might turn out that the government would earn more money with lower rates to lower incentives for using tax shelters, etc, but I think this reflects my goals.

My first (lesser) reason for wanting to raise the estate tax is that this money is currently just sitting around, not being spent.  Taking money away from citizens who would spend it on their daily needs to spend on government stimulus will be counter-productive.  While inheritors might spend some of the money immediately, it is more likely that they will save it. 

The primary reason I want to see higher estate taxes is for philosophical reasons.  A low estate tax helps enable plutocracies – for the rich and by the rich – from forming.  Inherited wealth gives, on the average, more power to less talented people than a meritocratic society.  Not only is it less fair, but inherited wealth weakens society.

I also believe that society simply has more of a right to a person’s excessive wealth once they have died than their children or other beneficiaries do.  (Note: Yes, I recognize that the Government of the United States does not equal American society, but it is the closest proxy I can think of.  If you don’t want your money going there, you’re still free to pick your favorite charities to receive as much as you want in tax-free donations).  The only thing the children of the rich (I use this example because children are by far the largest non-charity beneficiaries of inheritance) have done to deserve their inheritance is to have popped out of the right womb. 

And while a person can thank their individual skills and efforts for their success, I think all Americans who would be subject to my estate tax should than their lucky stars for being born in America within the last 120 years, with the wealth and opportunities it has offered.  The estate tax, I believe, is a good way of recycling wealth to provide continuing opportunities for future generations.

To illustrate how much luck plays a role in a person’s success, I want to paraphrase a thought experiment from Warren Buffett, currently the world’s richest person.  Imagine that a genie came to you before your birth and gave you two options.  First, you can be born into the Sudan or Bangladesh, where you have something like a 95% chance of being born into rampant poverty and all the problems that go along with it – lack of nutrition, no medical care, dirty water, and little prospect of receiving an education.  If you choose this option, you won’t have to pay a dime of taxes through out your entire life.  On the other hand, you can choose to be born in the United States, where your chances of being born into rampant poverty are only 10%, and even then, you still have a decent chance to pull yourself out by your proverbial boot straps.  Being born into the United States will cost you 50% of all future incomes, and 100% of anything you own when you die.

Personally, I’d choose the second option.  And in reality, I don’t have to pay anywhere close to 50% of my income in taxes.   

The current national debt is massive, but manageable if the economy continues to grow at modest rates.  It is my fear, however, that our economy (and those of other nations) will have trouble maintaining current rates of production – let alone keep growing – as we exhaust supplies of natural resources, particularly petroleum.  I am optimistic that we will be able to transition to a sustainable economy, even if that transition is rocky.  However, if we are saddled with debt, this transition will prove more difficult and have a greater chance of failure.  And I think it is completely appropriate to ask those who have benefited the most from our nation’s largesse to prevent the debt from growing too burdensome.