Why capitalists should like estate taxes

From Adam Smith to Thomas Jefferson, lovers of freedom have demanded that social privilege be earned -- not inherited.

Topics: Taxes,

It is inspiring to see William Gates Sr. (Bill Gates’ father and leader of the family’s foundation), George Soros and other wealthy people defending the estate tax. They know that repealing it would seriously harm charities and important government projects. But even more important than that is the issue of equal opportunity. Warren Buffett puts best why we need an estate tax: Without it, we will have “an aristocracy of wealth.” That elegant phrase brings out exactly why those who believe in capitalism should fervently defend the estate tax.

Estate taxes can easily look cruel or unfair if one calls them “death taxes.” In fact, however, they are the fairest of all taxes, and have a long and proud history.

Adam Smith taught the students who attended his jurisprudential lectures that “there is no point more difficult to account for than the right we conceive men to have to dispose of their goods after death.” He thought inheritance was clearly justified only when it was necessary to provide for dependent children.

Among those who attended Smith’s lectures was the historian and jurist John Millar, who supported a change in the inheritance laws such that wills would be enforced only for a limited part of a person’s property. Millar saw this as entirely compatible with a respect for property rights. He was joined in this, as in his enthusiasm for Smith, by Tom Paine.

And Thomas Jefferson, who described “The Wealth of Nations” as “the best book extant” on political economy, famously wondered at about the same time whether all hereditary privileges should be abolished since “the earth belongs in usufruct to the living.” He could have been quoting Smith with those words: It is “the most absurd of all suppositions,” said Smith, “that every successive generation of men have not an equal right to the earth.”

These worries about whether inheritance is justified at all have their source in a central principle of capitalist societies: the principle that social privileges should be earned, should be a reward for contribution to society, rather than handed out by government leaders or passed down by aristocratic dynasties.



One might expect those who decry welfare programs on the ground — who insist that everyone should work for their living — to be the first to embrace the notion that the children of the rich should not become rich themselves just by inheriting their parents’ money. Instead, we are treated all too often to the spectacle of wealthy heirs deploring the injustice in the fact that poor people might be given a leg up by the government, while insisting that there is nothing at all wrong with the many legs up they themselves have received from their parents.

There is, of course, nothing wrong with parents giving their children a good start in life. On the contrary, it is admirable when people devote their earnings to a comfortable home and a good education for their children, and when they give their children ample opportunities to find satisfying work.

But all this can be done without, in addition, passing on an estate worth so much that the children need never contribute to society at all. The passing on of such estates creates a large and unnecessary barrier in the way of social mobility, giving the children of the rich an enormous and entirely unearned advantage over the children of the poor. That defies our society’s belief in equal opportunity.

Three objections tend to be made to this argument. The first is that estates keep families together, that they are an expression of familial love. The second is that limiting the ability of parents to pass their wealth down to their children may sap the incentive people have to make money, and thereby depress innovation and initiative. And the third is that government taxes on an estate constitute an illegitimate infringement on the right to property.

The first and second of these arguments are wildly implausible. Inheritances are one of the largest sources of bitter family squabbles, and they lead even well-meaning people to look forward, to some guilty extent, to their parents’ deaths.

As for the second argument, people have ample incentives to pursue great wealth, whether or not they can pass it down to their children. They will avidly seek wealth for their own self-aggrandizement, for the opportunity to provide well for their families during their lifetimes and for the opportunity to endow charitable causes. It is hard to imagine that an estate tax, even a large one, will lead many people who would otherwise amass a fortune to sit back on their haunches.

So we are left with the argument from the right to property. But it is hard to see why people, after their deaths, should continue to have any right to property at all. Whatever we think about the immortality of the soul, we don’t normally believe that people should continue to have civil rights after they die.

Moreover, although it is part of the right to property to give gifts to one’s children during one’s lifetime, here too we draw limits to exactly what one can buy for one’s children. One may buy them a good college education, but not — directly, at least — a political office, a place in the army or civil service, or a job in a publicly owned company. Money allows one to help one’s children, but not to guarantee social status and power for them.

Aristocratic societies allowed parents to pass status and power down to their children; our society, in the name of equal opportunity, has long fought against that possibility. But if we therefore place limits on the gifts parents can give their children even during their lifetime, then we should certainly be able to restrict what parents can do after they die.

All of these are reasons why great promoters of capitalism, going back to Adam Smith and his students, have seen an estate tax as perfectly legitimate. There is no milder, fairer way of fostering social mobility, of making sure that equality of opportunity, distant dream as it still remains, does not disappear altogether from our scheme of values.

(A very brief version of this article appeared as a letter to the editor in last week’s “New Republic.”)

Sam Fleischacker is an associate professor of philosophy at the University of Illinois at Chicago. He is the author of "A Third Concept of Liberty: Judgment and Freedom in Kant and Adam Smith" (Princeton 1999) and writes frequently about the history of liberalism.

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