Death and Taxes; M. Spangler

Dr. Hans Sennholz, in Death and Mr. Spangler of Milton, Pennsylvania, is a student at Grove City College, with special interest in the Department of Economics headed by Dr. Senn holz. 626 Taxes, demonstrates this impact of taxation and examines especially the results of death duties. The original role of the federal government was limited to protect ing life and property from violence and aggression. Tax laws aimed simply at raising revenue for that purpose. But, as Dr. Sennholz says, "The new America that took shape in our century is a reformatory for man and society. Government has become a powerful agency of reform and redistribution .... Our present tax structure openly aims at greater equalization of income and wealth through tax rate progression:' His discussion of estate tax history clearly illustrates this transforma tion. The first Federal death duty began with a maximum rate of one1976 DEATH AND TAXES-A REVIEW 627 half per cent and lasted between 1797 and 1802 to aid in financing the national debt and the defense program. An estate tax was also used during the emergencies of the Civil War and the Spanish-Ameri can War, and the maximum rate was five per cent. However, in 1916 the death duty came to stay, taxing estates at a maximum rate of ten per cent. This maximum rate has been increased on occasion and pres ently stands at seventy-seven per cent. Yet, this rate hardly provides enough funds to operate the federal government for half a week. Cer tainly the objective of estate taxa tion is no longer to raise revenue but to redistribute wealth. In the name of social and economic equality, income and wealth are taxed at steeply progressive rates.

Dr. Sennholz concludes that pro gressi ve estate and income taxes do not achieve their purpose but actually "aggravate the economic inequality" they are supposed to alleviate. In other words, the gov ernment's endeavors to eliminate economic inequality have only made matters worse. To support his con clusion, he points to the nature of wealth and income in a market economy. Insofar as the market is allowed to operate, income and wealth are derived only by produc ing goods and services for con sumers. The greatest income accrues to the most efficient producers, who then can acquire addi tional capital assets and expand operations, income, and wealth. Their estates consist mainly of capital employed in economic pro duction. "A millionaire's fortune does not consist of idle luxuries, but of factories, machines, and equip ment that produce for the people, give employment, and yield wages:' By increasing the flow of goods and services, the efficient enterpriser raises the real income of other members of society. In addi tion, he accumulates capital which in turn increases labor productivity.

The fundamental determinant of labor productivity is the amount of capital ,that a worker uses. As capital per worker increases, his productivity and income increase. To have the most efficient producer manage capital and provide for its formation is in the direct interest of all workers. Any act which destroys and consumes capital must necessarily reduce the productivity and wages of workers. 1 Inasmuch as the income and capital acquired through production make up the fortunes of successful enterprisers, progressi ve taxation penalizes the most competent pro ducers and amounts to a tax on efficiency and production. Professor Sennholz warns that progressi ve 1 See also Dr. Sennholz's "Capital Consump tion;' The Freeman, May, 1976, pp. 282-299.

628 THE FREEMAN October income taxes, by aiming to expropriate increasing profits, actually restrain three important economic activities. A portion of profits is "manag erial remuneration," which is earned by a proprietor or partner. "That part of a businessman's income which is earned through his own labor is a kind of wage or salary, and as such totally unrelated to economic profits:' A second com ponen t of profits is ordinary interest, which is a return on capital. People value their pres ent cash more highly than a claim to future cash in the same amount. Consequently, to induce a cashholder to forgo present con sumption and convert his cash into capital which will return his invest ment only in the future, a premium must be paid. No interest payment means no capital. The third and remaining part of profits is pure or economic profit. By trying to an ticipate changing economic conditions and adapting production accordingly, enterprisers either suffer losses or earn profits.

These profits (or losses) result from the risk associated with the uncer tainty of the future. Whenever these economic profits are denied, no enterpriser will assume the risk of trying to adapt to future condi tions; economic progress ceases. Progressi ve taxation of income penalizes the most efficient managemen t, the accum ulation of capital, and the ability of en terprisers to meet fu ture economic needs. Means of produc tion are employed less effectively, the supply of capital dissipates, and the economy stagnates. A society which supports progressive tax rates is doing away with its most productive activities. Is that any way to run an economy? The SO-page paperbacked book, Death and Taxes, was published in 1976 by The Heritage Founda tion, 513 C Street, N.E., Washington, D.C. 20002. Copies also are available at $3.00 each fronl: The Foundation for Economic Education, Inc., Irvington-on-Hudson, N. Y.

10533. Supporters of progressive taxa tion may concede the uneconomical nature of progressive income taxes, yet may advocate progressive estate taxation: graduated death duties cannot harm a deceased person or penalize the heirs, who benefit no matter how much they inherit. Such shallow analysis avoids all economic issues. Hans Sennholz devotes most of Death and Taxes to showing that progressive estate taxes beget the same economic destruction as do progressive income taxes. "The creator of a taxable estate gives thought and effort to the 1976 DEATH AND TAXES-A REVIEW 629 impact of the levy that may greatly impair his life's work, ... and may make adj ustmen ts in his actions while he is still alive:' A progressive death tax may push a person with exceptional productivity into early retirement. He may prefer leisure to work, because the additions to his estate will be taxed at increasing rates. Society loses the proficient producer. Moreover, "death-tax con siderations cause him to be con sumption-oriented. Many estate owners are tempted to con vert their productive assets that yield income into consumptive assets for their own enjoyment:' The estate tax payer does not increase his capital assets but consumes his substance before the tax collector can get it.

Graduated estate taxes retard capital formation and thereby prod uctivity and wages. Furthermore, the estate tax's "potential victims cannot be expected to stand by when their economic accomplish ments are to be seized and dis tributed:' The affected estate owner will direct his energies to tax avoidance instead of productive management. When the estate owner finally passes on, the estate taxes result in pure capital consumption. Because the bulk of an estate formed under a free market is in productive assets, an estate tax is foremost a levy on capital. "Death duties do not immediately and visibly destroy such capital equipment as steel mills, railroads, or refineries. But they force the heirs or owners to sell all or part of the taxed estate in order to raise the cash needed for the tax payment. This cash is liquid capital that is consumed by govern ment visibly and noisily." Clearly, estate taxes do consume capital and oppress its efficient management, and must necessarily reduce .labor productivity, wages, and living standards.

Recall that government's purpose in imposing progressive estate and in-eome taxes is to reduce economic inequality. Death and Taxes shows these policies have the entirely opposite effect: "Taxes imposed on the rich are taxes on economic production. They consume the very capital that creates jobs.... To advocate higher taxes on the rich, most of whom are highly productive businessmen and investors, is to expropriate the very means of capital investment that afford jobs and better living conditions for the poor.... This is why, contrary to popular belief, progressive death duties do not diminish economic inequality; they are powerful instru ments for creating it. ... With every dollar of net (capital) consumption the worker's productivity must de cline, as must his wages and Iiving conditions .... The rich man, how ever, may manage through talent, industry, or thrift to 630 THE FREEMAN October preserve ... comfortable living con ditions:' The government has only nourished what it has set out to erase.

Death and Taxes clearly exemplifies one of the important lessons of the late Professor Ludwig von Mises: "Interference with the market. .. may in the short run attain ends aimed at by the govern ment. But in the long run such measures always result in a state of affairs which-from the viewpoint of the governmen t - is more unsatisfactory than the previous state they were intended to altee'2 Such measures disregard economic laws. Progressive estate and income taxation disregards the economic principle which Dr. Sennholz states as, "Economic and social inequality is inversely related to economic prod uctivity, income, and wealth. Ine quality tends to grow with declin ing labor productivity; it tends to diminish with rising labor prod uctivity:' As if graduated taxes were not damaging enough, government compounds their results by promot ing inflation-expanding the money supply. As Professor Sennholz exp lains, inflation causes prices to rise and expropriates purchasing power from moneyholders. Inflation redistributes wealth and income, 2 Ludwig von Mises, Bureaucracy (New Rochelle: Arlington House, 1969), p. 84.

consumes capital, and pushes tax payers into higher and higher brackets. Death and Taxes concludes with a particularly enlightening chapter. Hans Sennholz has analyzed recent estate tax alternatives and reform proposals. This reading dispels all wonder as to why progressive estate and income taxes flourish. The pro posals of the various individuals and organizations amount to little more than new methods or details of expropriating the estates. Many pre sentations are merely pleas for exemptions, privileges, and favored treatment. The alternatives dis regard economic principles. No men tion was made of the economic ruin caused by estate taxation. Moreover, no proponent even questioned the morality of the government's taxing the life's work of one person more heavily than another. What moral right does the government have in confiscating any part of a decedent's estate? A fight for tax relief based on political favoritism only advances the redistributive society, which uses estate taxes for its ends. The question of estate taxes, indeed any taxes, must rest on economic and moral principles. Death and Taxes exposes the futility of the estate tax. Dr. Sennholz has presented economic and moral principles which call for the summary aboli tion of estate taxation. ~ A Heartening JOHN A. DAVENPORT EVER SINCE Lewis Franklin Powell, Jr., now a Justice of the Supreme Court, wrote his famous memoran dum on the dangers in which the private enterprise system finds i tself~ businessmen and their acolytes have been bestirring them selves to improve their public image. As public opinion polls still show, however, these efforts have not been overly successful. And as Irv ing Kristol has pointed out, one has the uneasy feeling that while defen ders of enterprise have been win ning the battles they have bit by bit been losing the war. One reason offered by Kristol is that champions of capitalism have all too often tended to think in terms of ·economic efficiency, whereas modA former editor of Barron's and Fortune, Mr.