Death Duties

I was reading Martyn Bradbury’s post Generation X have been betrayed by neoliberalism and baby boomers.

I agree with many of the points he makes including some of the points made in the article he cites, insofar as economic inequality is a massive issue.

But I do not agree that we can attribute the cause of economic inequality to a birth cohort. The focus on generation ignores or at least treats as ancillary, an obvious cause, namely, speculation or rentseeking. It is not the fact of being born between 1946 and 1964 that destroyed free education, a robust welfare system and affordable housing in NZ. It is the speculative rentseeking behaviour of those – many born within that particular cohort, some before and some after – who were already privileged enough to participate in the speculative markets that created widespread economic inequality and preserved it through the 1980-1990 economic reforms through to today.

But I want to focus on the last statement Bradbury makes at the end of his post:

“A progressive Government coming into challenge this intergenerational theft should first consider reapplying death duties to redistribute all that boomer good luck to other generations”

The argument it stems from is more or less this: Baby Boomer’s (BB) were born into and lived through a unique economic boom that created many opportunities such as affordable housing (really it was cheap land), a robust welfare system and free education. This implies that during and as a result of the economic boom, BB’s were the recipients of the benefits that flowed from those opportunities without the struggle of repaying student loan debt and being priced out of the housing market unlike the generations following the BB’s. Therefore, BB’s should compensate future generations for the loss of opportunities by paying a tax on their death.

I understand why people romanticise about taxing the BB’s on their death (as morose as it is), because when faced with communities living in poverty, there is a whole generation to blame because we are told that BB’s had everything sweet.  In doing so, we neglect the highly unjust tax and monetary system.

Often missing from the debate also is that death duties will likely incentivise the wealthy BB’s (those these arguments usually target) to shift the funds of their estate to offshore tax havens.

So, in my view, changing the tax system to capture unearned income (during the lifetime of the individual) and targeting speculative behaviour is better than waiting for people to die.

An objection also worth noting (although highly unlikely and very slippery slope) is that wealthy BB’s may become targets of vigilante groups in extremely tough economic times, on the perception that they are worth more to society dead than alive [I don’t seriously think this is an issue, but its not an impossibility either].

The idea of death duties, in my opinion, is flawed for three key reasons (although this isn’t an exhaustive list).

Firstly, it is inefficient to (re)introduce another tax into an already complex tax machine.

Secondly, there is a simpler, more efficient and effective tax that could deal with speculative behaviour/rentseeking – land value tax (LVT).

Thirdly, death duties are hardly hallmarks of a progressive government, unless what we view as progressive is retro politics. Death duties were introduced in the 19th Century in NZ and by the mid-1950’s were (mostly) abandoned [see Michael Littlewood’s History of Death Duties and Gift Duty in NZ].

On the first point, I consider death duties inefficient for many reasons, including  that it is difficult to determine (even approximate) how much revenue will be raised in any given year and so that makes planning/budgeting on how to redistribute those funds uncertain. Also, no-one mentions how these funds might be redistributed back to society e.g. citizens dividend? or just paid into the states general fund? There is also the issue that the argument for death tax is intended to assist future generations, yet these are usually the direct beneficiaries of inheritance, so the tax takes from those generations. Although the suggestion is, it is fairer because it redistributes back to all. However, by putting back into the general fund, means that living BB’s still benefit from the deaths of their birth cohort, while the direct recipients have their inheritance taxed.

The uncertainty of fund levels also impacts on administrative costs such as staffing, office space, office equipment – noting that some of the revenue collected would be redistributed back into administrative costs, reducing the pool of funds available for social redistribution.  And the tax itself adds to the growing number of taxes (increasing bureaucracy) the government expects individuals to pay thereby increasing the reach of the state from the life of the individual into their death.

On the second point, the level of tax paid by the community is already excessive. Most people agree we need to reduce the tax burden not amplify it. The focus should not be on how many other taxes we can use to collect the revenue necessary to provide public services. I maintain my position that LVT and abolishing or significantly reducing all other productive taxes appears to be the fairest and most efficient way to deliver public services, alleviate poverty, disincentivise speculative behaviour and incentivise innovation and entrepreneurship.

So discussions on economic inequality ought to focus on how we can collect revenue efficiently and effectively while reducing the tax burden. Without reiterating previous posts, I have written on LVT  here and here and you can also view the LVT page of resources by clicking on the tab at the top of this page.

[Note: There are many Georgists/LVT proponents who do support inheritance taxes, so this post isn’t intended as a reflection of the broad church of Georgism/Geoism]

The third point is that NZ has had death duties in the past and they were abandoned. Calling a government progressive for reintroducing them is like saying a Beatles Tribute band is progressive. Death duties are retro politics. Admittedly, the same claim might be levied against LVT; however, LVT has not existed as a single tax and is currently being researched around the globe as economists and political and non-political groups look for ways to tame the speculative beast and ensure prosperity for all.

I’ll also point out, that some BB’s actually saved their earned income to pass on to their children. They may have struggled through their life for this specific purpose. Are their earnings something that we can justifiably tax? I’m not convinced it is at all.

I absolutely agree that we need to deal with economic inequality – and fast.  I also support the idea of redistribution, provided it is done in a manner that minimises hierarchy rather than reinforces it.  But if we unpack the phrase ‘death duties’ we see that it grants the state a ‘right’ to collect revenue from individuals on their death, since  individuals (would) have a correlative duty to pay the state on their death. Death duties are effectively a death tax, and taxes are collected through enforcement measures exercised through state hierarchy. So, death taxes reinforce state hierarchy through a perverse strategy for managing economic inequality by ‘waiting for people to die’ so that the state can ‘benefit from their death’.

I suspect many readers will disagree with me about death duties; however, my question is what does it say about humanity if there is not even freedom from the reach of the state in death?

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6 comments

  1. Note that speculation and rentseeking are not the same thing. Rentseeking involves the appropriation of monopoly profits and thus wastes resources pursuing something that necessarily reduces social welfare. Speculation, however, can increase efficiency. For example, if I have some information that the supply of corn, say, will be reduced in the future, I will want to stock up on corn now. While stocking up on corn now, I cause the price to increase, which in turn induces producers to increase their supplies of corn. My speculative behaviour increased the supply corn relative to a situation in which no speculation occurred.

    It is true that speculation can lead (and likely has led) to large inequalities in income, however, that is not in itself inefficient. (In fact, to the extent that speculation is socially useful, the lure of large profits will encourage more of the kind of behaviour we want).

    And another point to add to your list of inefficiencies of a death tax: to the extent that an estate tax encourages people to leave less of their wealth around when they die, it also encourages them to invest less and consume more while they’re alive. This has two implications: 1. the rich are encouraged to consume more while the poor are forced to consume less (generally, we’d expect this to occur through higher prices), 2. less investment now means there are fewer things to consume in the future.*

    *(This one’s particularly problematic if you think that New Zealanders already invest too little, and you don’t like that foreigners do most of our investing for us).

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    1. Thanks for clarifying the difference between speculation & rent-seeking! I believe I’ve made the mistake of conflating the two a number a times; although, I still think speculation is problematic, in that it can distort the market e.g. 2007-2008 food crisis

      Also, I’m not against foreign investment, but I am (obviously) opposed to certain kinds of behaviours 🙂

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      1. It’s not clear to me that speculation itself is the problem in the cases when it is associated with a market distortion. During the food crisis, for example, some governments were making very large and very damaging interventions in the market e.g. Russia banning wheat exports while being the world’s second biggest wheat exporter (http://online.wsj.com/news/articles/SB10001424052702303936704576397660484076084).

        Another good example is housing in NZ (and several other countries) at the moment. Investors are purchasing houses in the hope that prices will continue to rise. We might be tempted to claim that these investors’ speculations are the problem here. But why do they expect prices to keep rising? Because they believe that the supply of housing will continue to be constrained into the future. The result of the speculators’ behaviour is higher prices, and those higher prices are telling us that not enough housing is being built.

        Oh and yeah, I didn’t mean to suggest that you were against foreign investment, just that if any given person was against foreign investment they might not be so happy with the effects of a death tax.

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  2. Estate duties can also incentivise people to spend excessively on luxuries while they are alive, knowing that neither them nor their children will see any benefits from their wealth after they are gone. The opportunity cost here is the alternative, productive investments that miss out.

    In any event, NZ has had estate duties in the past (as you have noted). My understanding is that they were fairly ineffective as they were easy to avoid with trust structures.

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