Why the Inheritance Tax is Dumb

The Inheritance Tax is a dumb way to address America’s income inequality problem.

A government levies an estate tax or inheritance tax on a person’s estate when he or she dies. In 2019, the Internal Revenue Service (IRS) levied inheritance taxes on estates worth more than $11.4 million.

The greatest problem with the estate tax is modern life expectancy. It could be several decades before the government can get many billionaires’ and millionaires’ money through the estate tax.

Life Expectancy Makes the Estate Tax Stupid

The average American male can expect to live to 75.1 years, the Centers for Disease Control and Prevention (CDC) estimates.*

Hence, America’s richest man, Jeff Bezos, will not pay the estate tax until 2039 – if the Amazon founder lives a normal life span. If Bezos lives longer, the federal government may not collect his estate tax until after 2050 or 2060.

Remember wealthy people can buy best medical care. Thus, the wealthy often life a lot longer than ordinary people. Notably, America’s fifth richest man, Warren Buffett is 90 years old.

If Bezos, 57, lives until 90 Uncle Sam will not collect his inheritance tax until 2054. Therefore, Jeff will have plenty of time to spend most of his $201.8 billion fortune on rockets and space stations.

The situation gets even worse with Bezos’ ex-wife MacKenzie Scott, 51. Average life expectancy for American women was 80.5 years in 2020, the CDC calculates.* Hence, we will not collect Scott’s inheritance tax until 2050 if she lives a normal life span.

Given these realities, I consider the Estate Tax a giant tax break for people such as Bezos and Elon Musk. Musk America’s second richest man, is only 50. If Musk lives as long as Buffett, the federal government or the Republic of Mars will not collect his inheritance tax until 2061.

By relying upon an inheritance tax we give the ultra-wealthy a decades-long tax break. The estate taxes frees billionaires to keep making tax-free money for decades.

Charitable Deductions Make the Estate Tax even stupider

Moreover, it is probable that Musk, Bezos, and Scott will pay no estate tax when they die.

The three could pay little or no estate tax if they donate all their money to charity. Buffett is already doing just that through his Giving Pledge, To explain, Uncle Warren has vowed to give 99% of his $100 billion fortune to various foundations, Forbes reports.

Similarly, Scott is already giving away most of her money. Other billionaires including Bill Gates also pledge to give most of their money to charity.

Consequently, billionaires can have an enormous influence on society and pay no taxes. Obviously, most of the charitable work the foundations are doing is good. On the other hand, those foundations allow billionaires such as Buffett, Gates, David Koch, and Scott to force their values upon the rest of us.

Do we really want to live in a world where David Koch, Bill Gates, and MacKenzie Scott decide what is “good for society.” I think that decision needs to be made by the people’s elected representatives not the billionaire class.

The Estate Tax allows the Billionaire Class to reshape society to conform to their opinions. Hence, the Estate Tax threatens democracy.

A Wealth Tax is Better than an Estate Tax

A far better means of capturing millionaires and billionaires’ money is the wealth tax.

They base both the wealth tax and the estate tax on the market value of a persons’ assets. The difference is that they can collect the wealth tax every year.

Hence, we could collect decades of wealth tax from Bezos, Buffett, Gates, Scott, and Musk rather than wait for them to die. In addition, we can capture their money now not 25 or 30 years in the future.

My suggestion is a 29.8% wealth tax on all individually owned assets over $10 million. To explain, The Balance estimates that the average American paid a 29.8% tax rate in 2019. Thus, the rich would pay the same rate as everybody else.

Moreover, there would be no deductions of any kind or exemptions for the wealth tax. The wealthy will have to pay it in cash on all their assets every year.

Thus we could capture close to one third of billionaires’ wealth. Yet most Americans, including most rich people, would not pay the wealth tax.

How the Wealth Tax could prevent Plutocracy

One popular delusion is that we need an estate tax to prevent plutocracy. America, however, already has both a plutocracy and an inheritance tax.

Thus, the inheritance tax does not prevent plutocracy. To explain, our current system gives plutocrats plenty of time to accumulate and spend enormous amounts of wealth.

For example, Jeff Bezos could accumulate a $500 or $600 billion fortune by the time he dies. Musk’s fortune could be far greater if he takes his other companies SpaceX and Starlink public.

Forbes estimates SpaceX was worth $74 billion on 16 April 2021. I could find no valuation for Starlink but Musk has plans to take the satellite internet service public, Barron’s claims. Musk’s existing publicly traded company Tesla (NASDAQ: TSLA) had a share price of $678.90 and a market capitalization of $654 billion on 2 July 2021.

An estate tax will not collect a cent of the bonanza Musk will receive if he repeats Tesla’s success at SpaceX or Starlink for decades. A wealth tax, however, could capture a large percentage of that money for the US Treasury as soon as Musk makes the money.

Moreover, most of America’s current plutocracy did not inherit their wealth. On Forbes’ 6 April 2021 list of the 10 richest Americans, just one, Walmart (WMT) heir Alice Walton inherited her wealth. Tellingly, Walton came in 10th.

Inherited Wealth is Not the Problem

Thus, inherited wealth is not the problem in modern America. It is the money the rich are making now and will make in the future. We need to tax the wealth the rich have now, not what they will leave for their heirs.

We need to tax all wealth, inherited and non-inherited. A wealth tax could accomplish that goal. Plus, the wealth tax could prevent the wealthy from establishing a new aristocracy by taking the money they could leave to heirs.

A wealth tax will not limit the power of America’s plutocracy. Only direct wealth or income taxes could prevent plutocracy.