Inherited wealth shouldn’t get a free pass on taxes

Dan Duncan is reportedly the first billionaire to die during the one year since 1916 in which there is no estate tax in place. His heirs have hit the tax-free jackpot.

Duncan is the poster child for opponents of the estate tax. Described by the New York Times as a “soft-spoken farm boy who started with $10,000 and two propane trucks,” he grew his business until he became the 74th wealthiest person in the world.

With an estimated net worth of $9 billion, Duncan embodies the rags-to-riches story that Americans love. Even his choice of bequests — leaving his money to his family and his favorite charities — makes him seem “just like us.” Who better to enjoy Congress’ largesse?

However appealing, this story fails to capture the nature of the estate tax, including the people who benefit and are harmed by its repeal.

The one person who absolutely cannot benefit is Dan Duncan himself. When Duncan died, he was separated from all his property by a force even more powerful than the federal government.

The financial benefit of repeal flows directly to Duncan’s children and grandchildren, who will receive their inheritance free of estate taxes.

Not only do Duncan’s heirs receive their inheritance free from estate taxes, they also will pay no income taxes on it. While virtually all other income (everything from wages to lottery winnings) is subject to income taxes at rates as high as 39%, property that is received by gift or inheritance is tax-free, even when billions of dollars are involved.

This raises a fundamental question for those who support repeal of the estate tax: why should inherited wealth receive a free pass?

The most common reason given is that this money has already been subject to tax when it was earned by the decedent and to do so again would constitute “double taxation.”

But there is no general principle that says income or property gets taxed only once. To the contrary, property is often subject to multiple taxation when it is used for different purposes.

In any given day, we are all subject to a variety of state and federal taxes. For instance, your earnings are subject to both income and payroll taxes, and that money is taxed again when you pay sales tax on your purchases and property taxes on your home.

The double-tax argument is more fundamentally flawed for another reason. It is not dollars that are subject to tax — it is taxpayers. When a person earns $50,000 and then pays his mechanic $2,000 to fix his car, the mechanic cannot avoid taxes by claiming that the money was already subject to tax when earned by his customer.

The fact that wealthy heirs receive a windfall is only half the problem. The failure to collect estate and income taxes on large inheritances imposes significant costs on the rest of us.

First, Congress is giving up a valuable source of revenue. During the last 10 years, the estate tax has raised about $25 billion each year. Moreover, it has been estimated that if inherited income were subject to income taxes, this would have raised roughly $90 billion in 2009 alone.

Money raised from taxing inheritances could be put to good use: alleviating the tax burden for the less well off, funding programs that benefit the country as a whole or reducing the debt that we are passing on to our children.

Second, failing to tax large inheritances promotes concentrations of wealth that harm our democracy.

The United States is a very affluent country, but the wealth is distributed in a highly unequal manner. A few Americans own an enormous amount, and a large number of Americans own hardly anything at all.

What’s more, this disparity in wealth is far greater than disparities in income. Whereas the top 1% of earners earn 20% of all income, the wealthiest 1% of Americans own more than 33% of the country’s wealth. In contrast, 80% of households combined own less than 16% of the nation’s wealth. Inheritance plays an important role in creating this wealth gap, and failing to tax inherited wealth exacerbates the problem.

Studies consistently show that high concentrations of wealth correlate with poor economic performance of the country as a whole. Although no single cause has been determined, economists suggest that the reason is insufficient investment in education and other resources that benefit the country as a whole.

We see this in the United States today. Governmental policies in a democracy are supposed to be policies of the people being governed. But the wealthiest Americans — the group that tends to be able to either run for office successfully or fund the campaigns of others — have very different concerns than the general population.

Wealthy Americans have privatized education for their children, privatized security for their homes and privatized medical care through no-insurance concierge doctors. They are less likely to have the same level of interest in devoting taxpayer resources to good-quality public education, effective police and fire protection, and affordable medical care — let alone rights for workers and the unemployed

In the past, the estate tax, combined with such programs as the GI Bill, federal mortgage assistance programs and loans to small businesses, promoted a strong middle class and reduced the wealth owned by the top 1% from its high of 56% in 1912 to less than 20% by 1976.

Although our tax policies in the recent past have reversed this result, it’s not too late to change course yet again.

Ray D. Madoff is a professor at Boston College Law School.