When Thomas Piketty published his tome on inequality, Capital in the Twenty-First Century, he pronounced it inevitable that wealth inequality would grow. What he didn’t explain in any depth was why — even if his thesis were true — we should care.
In a book that runs more than 600 pages, the most Piketty could muster was the worry that wealth will collect in the hands of heirs rather than first-generation entrepreneurs, and consequently “undermine the meritocratic values on which democratic societies are based.”
Solution? Confiscatory inheritance taxes that will swallow up 70 percent to 80 percent of what affluent parents want to leave to their heirs. And it’s that “solution” that should frighten us — not wealth inequality.
Most Americans don’t care about economic inequality per se, but even those who believe that successful wealth creators deserve their fortunes are often suspicious of inherited wealth. It seems unfair for people to benefit from a fortune they haven’t earned.
But a person can have a right to much more than what he has earned. If a person enters a sweepstakes and wins a car, he hasn’t earned it in the sense that he earns his paycheck. But he gained it through a perfectly fair process, and it would be just as wrong for a thief to steal his car as it would be to steal yours. The salient point is that the car offered in the sweepstakes was earned — it was earned by whoever is giving the prize when they bought the car with their own money. They have every right to dispose of their property as they see fit.
The same goes double for inheritances. It is the parents who earned the wealth through their productive efforts, and to prevent them from turning it over to an heir is a monstrous violation of their rights. One of the reasons many parents work so hard is so they can pass on something to their children. If parents judge that their child merits inheriting their money after their death, denying them the freedom to pass on their wealth is no different from denying them the freedom to pay for their child’s education while they’re alive.
And when it comes to the heir, there is an important sense in which his bequest does have to be earned, as illustrated by the fact that so many once-wealthy individuals end up broke. (See 90 percent of retired athletes.) Given the dynamism of a free society, an heir who inherits a business empire will have to be able to improve upon it and outcompete innovative rivals, or else risk going broke.
Even an heir who decides to live off investments has to exercise judgment about how to invest his money. That, too, is a productive achievement, which helps launch new ventures, expand old ones, create new jobs, and fund new research. An inherited fortune, as much as one created from scratch, provides the fuel for economic progress.
Inheritance taxes, on the other hand, undermine investment and production. They are a tax on savings. To the entrepreneur who earns a fortune they are like a giant sign that says, “Don’t save. Spend, spend, spend!” There is nothing wrong with enjoying the fruits of your labor, but by depriving successful individuals of the freedom to pass on their wealth to their heirs, it encourages them to consume their fortune even though they might prefer to invest it.
Whether their fortune gets spent on yachts, donated to charity, or seized by the government, it gets taken out of the productive economy. Less savings, less investment, less economic progress. As economist Steven Landsburg concludes, “(Y)ou don’t need rich parents to be a victim of the death tax. You don’t need to own a family business or family farm. You only need to be someone who works in a factory or shops in a grocery store or gets sick and goes to the hospital.”
For those who do own a business, especially a small, family-owned business, it’s worse. A high estate tax can leave an heir with a bill that far surpasses the business’s annual profits, forcing them to sell off the business to pay the tax.
Piketty’s prediction of a future where the ranks of the wealthy are made up mainly of heirs is factually groundless — as just one indication, less than a tenth of those who appeared on the Forbes 400 list of the wealthiest Americans in 1982 were still there in 2012. But the deeper issue is this: even if it is true that heirs haven’t earned the wealth they inherent, “society as a whole” certainly hasn’t earned it either.
Inequality alarmists like Piketty don’t want to tax inheritances because they have a deep commitment to people getting what they deserve. They are using our skepticism of inheritances to deprive people of what they own and have every right to keep. The death tax isn’t about fairness — it’s about fighting an economic inequality that they regard as inherently immoral.