Trego's Mountain Ear

To explain why a 100% inheritance tax is an absolutely terrible idea (and it becomes terrible well before 100%) requires knowing the answer to a rather different question: Why do plant trees? Especially, why do old people plant trees?

The apples I planted will bear fruit some years from now. The oaks we planted this year may produce acorns in my lifetime, but certainly not any large harvest. They are not for me.

Why do plant trees the fruits of which we will never see? The answer is simple. We plant trees for the future.

If you cannot give your labor to the future when you are old, what reason have you to work any more than to meet your own needs? Taxation is a system of incentives and disincentives. The higher the tax on something, the more it is discouraged. This is an obvious principle when applied to sin taxes, as occur on cigarettes and alcohol.

It is less obvious with sales taxes, because all of us must purchase things occasionally. But if we have a choice on where to make that purchase, there are some things cheaper to buy in Kalispell or Eureka than Whitefish, because of Whitefish’s resort tax. And we will buy less, simply because we can afford to buy less. Maybe it isn’t much, in any single grocery run. A pack of gum, or perhaps a loaf of bread, but sales tax does reduces purchasing.

Do income taxes provide an incentive to earn less income? At some point, yes. Taxes lower your effective wage. Everyone knows, or learns painfully on their first real job, that $15 an hour does not actually mean you get $15, not after the government gets its cut. High taxes can mean that working a few more hours brings very little money. And if, for example, the net gain is only $10, you might choose to spend that time another way.

An inheritance works the same way. Why would anyone choose to accumulate wealth for the purposes of handing it to the government? Certainly it hasn’t proved itself a responsible spender of other people’s money in the past. It doesn’t really matter if you’re planning on passing your wealth on to a kid, or to a charity for cats, you don’t want to work extra just for that to go to government. If everything you leave behind goes to the government, there’s no real reason to accumulate anything beyond the minimum to live in your preferred lifestyle.

Why is that a bad thing? From a national perspective, wealth isn’t actually dollars. Rather, it’s units of human production. When government creates incentives to work a minimum amount, it will reduce national productivity, which is an economic issue much better avoided.