Monday, April 2, 2007

"Unearned" Wealth & Character

One of the things in this world that doesn't really affect me, but which I really hate on principal is taxation levied on inheritances in one way or another. The way I see it, the money has already been taxed when the person giving it away earned it and there is no justification for taxing it a second time (I know that the premise of that position would lead to having to object to sales tax and, for that matter, almost every other kind of tax; I'm fine with that, for the time being).

One justification I have heard is that it is not fair that some people simply get a ton of money dumped into their laps because their parents (or someone else) gave it to them. The logic is that that creates inequality because some people have a "leg up" so to speak that they didn't earn themselves. To this, I respond in the first place that I do not accept the premise that inequality of this kind (or any other kind, for that matter) is an essentially bad thing. After all, some people are born taller than others. Should we force them to undergo some sort of surgical procedure to make sure that everyone is the same height? Of course not.

Likewise, to use a more pertinent example, economic inequality between people begins the moment they are conceived - not the moment their benefactor dies and wills something to them. After all, the fact that the child of a millionaire receives a large inheritance upon the death of his progenitor(s) most likely has far less to do with the inequality between him and the child of a lower income family than the very fact that he was raised by wealthier parents and, therefore, most likely enjoyed certain advantages such as better education, better contacts, etc.

Thus, I do not accept the premise that inequality should be avoided even at the cost of government intervention.

Furthermore, as long as the argument is focusing on fairness, I feel compelled to point out that my main objection to inheritance taxes is that someone who has worked very hard their entire life and has, through sheer determination, hard work, and frugality, managed to accumulate a decent amount of money which they would like to leave to their children (or someone else) will be taxed to death (no pun intended) on money on which they have already been taxed because they dare to give it to their children instead of spending it on themselves. This seems to be the real injustice here.

Another argument I have heard in defense of inheritance taxes is that, when someone inherits a large amount of money and, therefore, does not have to work as hard/efficiently/well/etc. to obtain what they need or desire, their character is the poorer for it. While I am inclined to accept this line of reasoning, I hold that it is not the government's function to take away someone's money for the betterment of their character or the perpetuation of the "American Spirit". It is not the government's job to try to encourage innovation and invention by imposing hardships.

Another argument I have heard is that inherited wealth is unearned and, therefore, somehow illegitimate and should be taxed or otherwise taken away by the government. This to me is just absurd. Where is it written that all assets must be earned by the person who possesses them!? Remember, of course, that even inherited wealth was earned - just not by the person inheriting. If one were to object that wealth derived from capital gains or other investments are unearned even by the person willing them to another, I would respond:

(a) Define "earned". In my opinion, wealth from investments (which is usually what I hear referred to as "unearned") is in fact earned. After all, the person only received that wealth in exchange for the use of their capital for a period of time during which the person could not use it themselves. Thus, the person earned the resulting capital gain by means of delayed gratification - they earned it by having the self control to commit to not using it for a period of time.

(b) Even granting that wealth derived from non Wages/Salaries/Tips (can you tell that I recently did my taxes) sources isn't "earned", what does that have to do with anything? Why is unearned wealth somehow bad? Why does the government have the right to tax unearned wealth qua unearned? Is it somehow detrimental to society and therefore worthy of being discouraged by means of taxation? Absolutely not - quite the opposite.

(c) Again, even granting that wealth derived from non Wages/Salaries/Tips sources isn't "earned", and that unearned wealth is somehow illegitimate when inherited, all that means is that inheritance tax should be set up in such a way that only unearned wealth is taxed. I believe, though, that this would prove to be impossible in the real world.

To address once again the hidden premise that all wealth should be earned by the person who possesses it: this premise is so absurd I don't know if it is even worth addressing. Wouldn't accepting this premise necessarily lead to the taxation of teenagers for every dollar of benefit they derive from their parents? Food, shelter, clothing, education, rearing, etc. All of it is a form of wealth - much of it tangible and much of it such that they will continue to possess it even after they leave the nest - and not earned by them.

While I have been meaning to post on this topic for quite some time, the catalyst for this happening today was and article on TCS Daily entitled "The Perils of Unearned Wealth" in which the author sketches a brief outline of the problems that arise when people inherit wealth rather than earning it themselves.

To be clear: I am well on board with the idea that people who inherit most or all of their wealth early in life turn out the poorer (in terms of character) for it. I would tend to agree with the author:

"Scarcity is a tutor and when it is no longer there to restrain our appetites, only character remains. If character was never developed... well, just watch today's news and you'll see."

This detrimental effect of inherited wealth, however, is not a necessity but simply what seems to happen a large portion of the time. It seems to me, then, that, as with virtually everything (tangible and intangible), there are good and bad ends to which inherited wealth can be put and, as is more pertinent for this discussion, good and bad effect that it can have of itself. Given the fact that there are good - or at least neutral - effects that it can have, it seems that it should not be subject to regulation, just as kitchen knives, which can be used to murder people, are not regulated because they are primarily intended and used for perfectly legitimate purposes.

It seems obvious that society cannot accept the premise that, if something is potentially harmful, it should be regulated or forbidden. If society were to accept that premise, society would simply cease to function.

Thus, even though I would hold that it is the case that inherited wealth often has bad effects, I do not think that it should be punished in and of itself by means of a tax that applies to everyone regardless of their character and whether it would be adversely affected by it.

Also, I would like to point out that how one's character is affected by inherited wealth has to do with how one is raised and how one develops as a person before (at least logically if not temporally) the inherited wealth comes into the picture. I would hold that the root cause of detrimental character affects is not the inheriting of the wealth, but the prerequisite character flaws that occasion it. If that is the case, what the government should focus on affecting (assuming the government has a right to be involved in such matters in the first place) is the earlier character formation - not the amount of money a poorly formed character inherits later.

As an aside, I hold that the extent of the government's legitimate role is such things as character development would be ensuring a stable peace in society (primarily through law enforcement and civil defense) in which people can develop independent of government influence - precious little, if any, more.

Anyway! That was a very long post simply to say that I don't like inheritance taxes.


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