It’s called the death tax. Many analysts believe Congress will take some sort of action on it this fall since the tax is slated to expire at the end of the year. A recent report from the American Family Business Foundation concludes that if that tax indeed expires, North Carolina could see thousands of new jobs. John Locke Foundation President John Hood recently discussed the death tax with Donna Martinez for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Martinez: What in the world is the death tax?
Hood: Well, it’s not a tax you pay when you’re alive, so that kind of distinguishes it from the other taxes that we’re familiar with.
Martinez: The many other ones.
Hood: Actually, the person who dies doesn’t technically pay the death tax. If you think about it, an inheritance tax or an estate tax – both terminologies really amount to a death tax – they really tax people who receive inheritances or estates. Technically, an estate tax taxes the estate before it’s passed out to the heirs. An inheritance tax actually taxes the heirs when they get the money, but of course it’s basically the same thing. Someone passes away, their house, the other financial assets the person owns, are then conveyed to heirs, and a tax is levied. The argument for death taxes — going back really hundreds of years — really amounts to nothing more than, it seems unfair for the heirs to get money from the person who passed away, it would create rigid classes of rich and poor, and we have to break that down with death taxes. The reality is very different. Most people who are wealthy today did not inherit their wealth; they created it. Most inheritances, while some of the estates may be large, because there are so many different people getting the inheritances, it just doesn’t accomplish this social stratification that the proponents of the death tax have always claimed they’re trying to get at. What it really is, is just a grab for money so the government has more money to spend, and that doesn’t really pass the test of reason.
Martinez: If the death tax is allowed to sunset, to simply go away, how then would that translate into new jobs in North Carolina?
Hood: A very important thing to remember about inheritance taxes, estate taxes, any kind of taxes that are levied on people with large amounts of money — it doesn’t affect small-dollar inheritances; most of those would be exempted from these taxes. When you’ve got hundreds of thousands or millions of dollars of an estate that you’re going to pass along to someone when you pass away, you’re probably capable and affluent enough to hire tax lawyers and structure your assets in such a way that a large amount of the money is not going to be taxed by the death tax. This is why eliminating the death tax will not necessarily cost the state or federal treasury all that much money, because the money that the estates have will simply be invested differently when they’re no longer subjected to a death tax. The reason why the death tax is related to economic growth and job creation is exactly that. Instead of binding up assets in tax shelters and foundations to give money away, that money can instead be productively invested in new jobs and new opportunities for people. Lots of estates that are affected by these death taxes are essentially small businesses. Someone has built up a business over the course of life — or on a farm or something like that — and sometimes you have to sell these assets in order to pay the death taxes if you haven’t structured your business in a certain way. And that means that enterprises that might be viable and employing people go away, or at least chunks of them go away. So to get rid of this artificially punitive death tax is to unleash more capital investment, is to prevent some of these businesses from being broken up to pay the taxes. And that’s good for the economy.
Martinez: The whole issue of job creation and economic growth, economic development, is a fascinating one. And, in fact, we’re hearing that conversation a lot right now as we have the debate in this country about whether or not President Obama’s so-called stimulus package will indeed save or create jobs. What is your view on the key factors for job creation in a state like North Carolina, which is really transforming itself? Tobacco [and] manufacturing are going away.
Hood: Yes, and those traditional lynchpins of North Carolina’s economy have been going away for decades. North Carolina has to be a more attractive place to live, work, shop, invest, create jobs. That’s the bottom line. People have choices in where they’re going to live. High-income professionals — people who’ve invested a lot of their money when they’re young to be doctors, lawyers, investment bankers; people who are entrepreneurial and go out and start new firms — they get to choose where they’re going to do that. And they can go to a state like, say, Florida or Texas where there is no income tax — of course there are higher sales taxes to compensate — but the overall tax burden is lower. Most of these kinds of states do not have a death tax of significance, and they can go there and have the prospect of keeping more of their money over the course of their lives, or they can come to North Carolina and pay higher taxes for what does not appear to be better government services. That decision is not working in North Carolina’s interest right now. That’s why we have one of the worst — one of the weakest — economies in the United States. We have to make North Carolina a place people want to come to, not just to get benefits or jobs, but to create jobs. People who have the wherewithal, who are investing, entrepreneurial companies, high-in-value professionals – those folks generate a tremendous amount of the tax revenue for a state. They move the levers of economic growth and investment, and in North Carolina, they’re not welcome.
Martinez: An argument we hear quite a lot, however, is that those corporations, they’re kind of these elitist, very well-to-do people. They’re not paying their fair share.
Hood: Well, it depends on what you mean. Certainly state and local taxes by themselves are somewhat regressive. That is, people at the upper income in North Carolina pay a smaller percentage of their income in state and local taxes than people at the lower end. Of course they’re also simultaneously federal taxpayers, and at the federal level they pay vastly more — the wealthy do — than the poor do. So the overall tax structure — federal, state, and local — is what is called progressive. I prefer the term punitive. The more income you make, the higher the rate of taxation. So it is simply not the case that rich people escape taxation. They pay more than a proportionate share of the tax burden in North Carolina and every other state when all the taxes are considered. Of course, that’s just who is writing checks to the government. That doesn’t tell you who is bearing the cost of some of these taxes. We were talking about death taxes. People who will lose jobs or not be employed because of the existence of the death tax — no, they’re not writing a check to the Treasury for the inheritance; they never got an inheritance. But they are bearing the cost of that tax because of the opportunities that are forgone, the opportunities they no longer have because entrepreneurs and investors in North Carolina have been chased away.