If you’ve taken to watching the spate of reality shows centered around the antics of rich socialites, such as “The Simple Life,” “Gastineau Girls,” or “Newlyweds,” you’re probably wondering how people so miserably immature and ignorant manage to survive in this world. Then you realize, oh yeah, they’re rich.
To some, that doesn’t seem very fair. How can Paris Hilton, whose only innate talent is her airbrushed looks, be so lucky as to be born to a hotel mogul while the rest of us have to slog it out with our brawn, brains, or tenacity? While she flounces through life going through thousand-dollar shoes like Kleenex, we have to go to college, rack up student loans, get boring jobs, pay mortgages, and drive sensible cars. Definitely not fair.
One way that the Paris Hiltons of the world have gotten their comeuppance has been through the estate tax, where the government would grab over half of Daddy Hilton’s monstrous estate as he tries to pass that wealth on to his daughters after his death. Paris would still be plenty rich (recent estimates peg her share of the take at $28 million), but not as rich as she could have been. The hope then becomes that this would prevent a long line of Paris Hiltons from coming about. Nothing offends the sensibilities of decent folk more than the idle rich, after all, and if Daddy Hilton was able to pass on his wealth to his family, then it might take generations before any of his progeny ever had to work a real job.
And that just is not fair. Right?
Right. It’s not fair at all. And yet the House of Representatives did the right thing in voting to repeal the estate tax last week.
How can I say that? Am I really in favor of a world dominated by Paris Hiltons? No. The simple fact is that the estate tax does little to actually prevent this from happening. While in the old days wealth was almost entirely determined through land ownership, today’s wealth is based on more flexible assets like stocks and bonds. Rich people can afford accountants and estate planners to arrange these assets so as to avoid the estate tax. In most cases this means that kids like Paris will be getting their inheritances early. By the time Daddy Hilton dies, his daughters will already have whatever he wants them to have.
But this is very inefficient. Because the tax is such a huge bite, the wealthy spend large amounts of money to avoid it. This is money wasted. When it comes to the small business owners who are successful enough to face the estate tax, this means spending money to avoid a tax that would be better spent on hiring new employees or expanding the business. The Joint Economic Committee estimated that small businesses spent about as much to avoid the estate tax as was ultimately reaped by the government in revenue. Instead of more jobs and products, we got more estate planners. Brilliant.
Supporters of the estate tax have been quoting from Teddy Roosevelt, who instituted the estate tax in the first place based on his notion that “[t]he man of great wealth owes a peculiar obligation to the state because he derives special advantages from the mere existence of government.” Even if this is true, progressive taxation on income has already accounted for this obligation. By the time of the wealthy person’s death, his or her obligations and advantages have already passed.
Alternatively, some Democrats argue that a repeal of the estate tax means fiscal irresponsibility in the face of deficits. According to Rep. Pete Stark (D-CA), repeal would cost the government $300 billion or so over the next ten years. While it is true that cutting government revenue without also cutting spending worsens deficits, and even many libertarians have acknowledged that efforts to “starve the beast” have largely failed, that doesn’t make an estate tax a reasonable or efficient way to collect revenue. Besides, $30 billion a year is chump change on the Hill.
Problem is, the Senate has refused to end the estate tax before, and likely refuse again. There is an alternative for the House to consider: Make the tax rate too low to be worth fighting. An estate tax at, say, five percent would be too low for Daddy Hilton to bother restructuring his estate over, and wouldn’t be too much of a hindrance to inheritors of smaller estates. There would probably be less overall revenue for the government, but at least money wouldn’t be wasted trying to avoid the tax. If we’re going to be stuck with Paris Hilton, we might as well save money while we’re at it.
Besides, the American public sure seems to get a kick out of rich people acting like fools. Let the Daddy Hiltons be productive so the Paris Hiltons can entertain us. We’re better off either way. Forget the estate tax; save Paris!
James N. Markels is an attorney and a regular columnist for Brainwash.