Tax Spending--Not Work, Savings

I have been writing, lecturing and testifying against the gift and estate taxes--so-called death tax--for many years. My work has been credited with getting the current anti-death tax movement started. I have nonetheless been as shocked as anyone that politicians actually seem to have listened. We now stand at a moment when the death tax may be altogether eliminated, as the recent House tax cut bill would do, or reduced, as even Democratic compromises now propose.

Logically, I should be happy with this turn in public policy. I am not. The acts that repeal the death tax go beyond principle to cut taxes for all of the rich, giving a further break to the most fortunate at a time of the greatest wealth disparities in our nation’s history. These packages reflect reckless budgeting and are based far more on selfishness and greed than on fairness and principle.

It may sound paradoxical to oppose the death tax on the one hand and to support fairer, more redistributive tax policies on the other. It is not. Repealing the death tax is not about helping the rich get richer. It rests on principle that has nothing to do with supply-side economics or lessening what progressivity we have in taxes (which is typically overstated in news accounts that look only to the income tax and ignore the increasingly important payroll, state and other taxes that are regressive). Far from it. We should repeal the death tax because it rewards rich spenders and penalizes rich savers. This is backward. Precisely what even the most liberal politicians should want the rich to do is to continue to work and save their good fortune, not spend it all on luxuries for themselves.

My argument against the death tax has always been a specifically liberal one. The death tax falls only on those fortunate individuals who have worked hard and saved well. It is a tax on savings, thrift and inter-generational altruism. The surest way to avoid the tax’s sting is to spend it all, now. The tax thus encourages and rewards the high-end consumption of the rich and punishes thrift. This strikes me as perverse.

There is nothing wrong--nothing that the wider society ought to complain about--with work and savings. It is spending and only spending that we should be taxing. Spending is voluntary. Decisions to spend reflect private decisions about lifestyle. By contrast, work and savings help us all by contributing to society’s common capital stock. It is thus no coincidence that the death tax is widely unpopular; it’s a bad tax.

It isn’t all that hard to move tax policy in a more principled direction. The ideas are simple enough. We should repeal the death tax and lower or eliminate all taxes on savings--going farther, more systematically, in the direction of the Clinton administration’s unlimited savings account idea.

The problem with the Clinton proposal is that it only helps middle-class savers, while wealthy savers are just as helpful and noble. But having systematically eliminated taxes on savings, there is no reason not to maintain or even to increase tax rates on high-end spending.

Since a tax on nonsaved wealth is essentially equivalent to a sales tax--we spend what we don’t save--we even can have an actual sales tax plus a rebate to substitute for the two lowest brackets. This would eliminate the need for most Americans to fill out tax forms. The wealthy--say those making more than $100,000 a year--can continue to pay a supplemental “income” tax that, because of its unlimited deductions for savings, is in essence a consumption tax.

The unlimited savings accounts can be passed on to anyone, in life or on death, without paying taxes on the transfer alone. The heirs can then be taxed, when and as they withdraw money to spend. The result would be a consistent, progressive consumption tax--in essence, a progressive national sales tax. This means consistently taxing spending, not work or savings. The progressive elements, namely the rebate and the supplemental income tax, mean taxing luxurious more than ordinary spending, and ordinary more than basic spending. That’s all pretty simple, principled and fair.

There’s also nothing inconsistent in any of this, unless we have finally gotten to the sorry state where any principle at all is inconsistent with tax politics.