Elimination of the Inheritance Tax

"Grant me thirty years of equal division of inheritance and a free press, and I will provide you with a republic." - Alexis de Tocqueville.

When Alexis de Tocqueville penned Democracy in America after his travels through the United States from 1831-1832, he noted the salutary consequence of the fact that the young republic had no law of primogeniture, passing estates intact solely to the first born. Since the first born cannot count upon inheriting his father's estate, it is harder for landed estates to perpetuate through generations. Sons of the wealthy might realize some advantage from their affluent start in life, but one important consequence of the division of inheritance is that most heirs would have to make their own way in the world and could not rely on inherited wealth. This recognition encourages the individual industry and ambition that helped girder rapid American economic growth. The American economy is the beneficiary of this rigid meritocracy.

Some current Americans of a redistributionist bent are wont to cite de Tocqueville, usually an authority reserved for Conservatives, in defense of draconian inheritances taxes. Their argument is that inherited wealth robs heirs of their ambition and the country of the exertions of these heirs. The confiscation of estates is necessary for a robust economy.

Such an argument might be persuasive if wealth tended to propagate in families generation to generation. This is empirically not the case in the US. The current division of inheritance among children mitigates against accumulations of great wealth over many generations. In the US, there is large wealth mobility with the rapid and frequent migration of individuals from the lower to higher percentiles in wealth, while others descend this ladder. For example, according to Kerwin Kofi Charles and Erik Hurst [1], 20 percent of parents in the lowest quintile of the parent's wealth distribution had children rise to the top two quintiles. They further found that, "Age-adjusted parental wealth, by itself, explains less than 10 percent of the variation in age-adjusted child wealth." According to economist Bruce Bartlett [2], 80% of US millionaires acquired their wealth without benefit of a financial inheritance. Most wealth in the US is accumulated from privately-owned businesses and personal savings. The argument that we need more economic mobility is not a sufficient excuse for more severe inheritance taxes.

The economic impact of inheritance taxes is more limited than Conservatives believe or Liberals wish. The very wealthy can usually manage to create trusts and devise other mechanisms to avoid taxes on the generational transfer of wealth. Unfortunately, inheritance taxes hit most severely on the modestly affluent, especially the owners of small businesses who don't realize that they have really accumulated substantial wealth. The inheritance tax is less a tax on wealth, and more a tax on the neglect to properly estate plan.

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