Libertarians for an Inheritance Tax
I rarely give thanksÂ for Neil Reynolds, but todayâ€™s column is a must-read. The point is that taxing large inheritances should appeal not only to those of us concerned about highly unequal outcomes, but also to those simply concerned about equality of opportunity.
It may or may not be possible to justify inequalities based on differences in effort, skill, intelligence, etc. However, there is no justification for huge inequalities based on heredity alone.
Except, of course, that Canada already has an inheritance tax – the “deemed disposition on death” for capital gains tax, as Neil Reynolds mentioned (kind of unclearly) halfway through his article.
The U.S. has no deemed disposition on death (in fact, the basis for capital gains calculation “steps up” to the then-current market value on death), so an estate tax makes sense for them.
In Canada, if we were going to reintroduce estate taxes, we should to be consistent remove the “deemed disposition on death” first. In fact, Canada’s current system is superior, since an estate tax inescapably requires a gift tax as well, to avoid deathbed gifts – administering everything through the income tax system is much more efficient.
Capital-gains tax applies to only half the value of unrealized capital gains in an estate rather than to the full value of a bequest. Deemed disposition is not a substitute for inheritance tax, but a deferral of regular income tax on previously accrued capital gains.
Yes, rcp, thanks for making that point. Neil Reynolds would have done well to read the 2011 Alternative Federal Budget where on page 26 it proposes introducing an inheritance tax, but says this would be to tax what doesn’t get captured by capital gains taxes, which should be at a higher rate than US-style inheritance taxes.
It was of course a surprise to see this from Neil Reynolds, but he is (once again) wrong about the amount of revenue that would be raised from such a tax and skims over inconvenient facts.
I disagree. Prior to 1972 Canada had no capital gains tax, but did have estate taxes.
When the capital gains tax was introduced, it had a couple of features differing from other countries’ versions of the tax:
1) Deemed disposition on death
2) Deemed disposition every 21 years for assets held by most trusts.
At the same time that capital gains tax was introduced, estate taxes were abolished. So as a matter of history, and of tax policy, “deemed disposition on death” was definitely introduced as an inheritance tax, a substitute for the previous estate tax.
I’m not clear why the history of it is all that relevant. So once, for presumably terrible reasons, we had no capital gains tax. Well, good thing we changed that, although not nearly enough as capital gains are taxed much less than income from doing useful things. And, so, at the same time we brought in a capital gains tax, we got rid of the inheritance tax–evidently the wealthy still had enough control, even near the height of the welfare state ideology in 1972, to successfully push for such a trade-off. Well, that’s a pity, but I don’t see why it means we shouldn’t have one now.
Taxing dead people is a great idea, no matter what we did in 1972. I guess that’s selfish of me–as a living person, they aren’t really my constituency. Tell you what–hands up all the dead people who don’t want to be taxed. Nobody? Right then.