A Non-Distortionary Tax

Dead people aren’t allowed to drive.  They aren’t allowed to vote.  They aren’t allowed to testify in court, acquire weaponry, check out books from the library or acquire a pilot’s license.  This makes sense.  After all, dead people don’t have a functioning brain.  As a result, we wouldn’t want them driving or voting or wandering around the local library.  But there is one thing dead people are allowed to do.  They’re allowed to dispose of assets, or rather, to direct how assets should be disposed of.  We call that bestowing an inheritance.

Now, you might argue that the dead people aren’t actually disposing of assets.  Instead, pre-deceased people are disposing of their assets, with the disposal being on hold until expiry is complete.  The time in between can often be measured in many decades.

But this just makes the concept even less logical.   After all, you don’t get to decide that someone else can use your driver’s license when you run out the clock, or vote on your behalf when you croak.

A second, bigger problem is that the concept of inheritance is anti-capitalist.  The beauty of capitalism as described by Adam Smith is that the magic of the free market, guided by the Invisible Hand, moves resources in the direction of their highest marginal product use to society. This works through everyone’s personal greed, or enlightened self-interest.  Each person faces benefits and costs, and they try to maximize the difference between the two.  But for dead people, there are no costs or benefits when disposing of assets.  Cadavers don’t care.  (In that respect, they’re sort of like the honey badger, but quite a bit more so.)

The process of inheritance also causes the Invisible Hand to break down with live people.  A person making decisions in the construction of his/her will or trust bears no cost for their decision.  They might gain a benefit in the form of a sense of satisfaction for taking care of their heirs, or derive some enjoyment from the groveling of would-be heirs, but without a cost, that amounts to a free lunch.  And a free lunch is a violation of the Invisible Hand.  It is, or it generates, an inefficiency.

So what would be an alternative to inheritance and bequest?  Whatever it is, it would need to fulfill the point of inheritance, which is for someone to benefit their loved ones by bestowing assets on them.  And it turns there is just such a thing:  a gift.  In other words – if you want to give someone something, give it to them.  Now, later, whenever.  But do it when you’re alive.  If you give it to them when you’re dead, you literally had your cake and ate it too.

Actually, to keep the Invisible Hand operating, outright gifts aren’t strictly necessary.  Simply stick the name of the beneficiary on the asset as a co-owner.  Make them part owner of the business you want to pass on to them, or give them check writing and withdrawal privileges on your bank account.

The argument against it – “but I don’t trust that person and I need that money/business/farm/collection of Davy Crockett figurines” – is, quite frankly, disingenuous.  If you don’t trust them with your business or your money when they’re alive, but you do when you’re dead, it’s a sign you don’t care about what happens when you’re dead.  Which is another way to say the Invisible Hand breaks down when it’s pointing at you.

All of which raises one more question – if a more capitalist system was adopted, what would happen to the assets held by a person who died?  Well, if the assets were held jointly, with both parties having equal decision making power, then the surviving asset-holder would simply gain sole control over the asset.  Thus, those who wish to pass their assets on to their children would simply give their children equal rights to their assets while still alive.

But if a single person held an asset in its entirety in its entirety and passed away, then the asset would revert to the government. Call it a tax.  A 100% estate tax.  (Small exceptions could made in the case where the pre-deceased chose to create a trust to benefit minor children, the severely disabled, or other special cases. Or maybe more effective ways to transfer and protect minors and the severely disabled could be found.)

The winner would be government tax coffers.  (More on this in a moment.)  The losers would be those would-be heirs that aren’t quite liked enough or trusted enough by today’s asset holders to receive joint ownership of the property.

Whatever the government collects in this way could be sold off to the highest bidder.  Among other benefits, that reduces the need for other taxes.  And those other taxes are collected from live people.  If the goal of taxes is simply to fund government operations, less taxes need to be collected from the living if some is being collected off the dead.

And here I note that a tax on dead people  has one big advantage over a tax on live people:  it is closer to non-distortionary than any other I can name.  Non-distortionary taxes are taxes that don’t change people’s behavior, and don’t prevent people from doing what they otherwise would do simply to avoid the tax.  Income taxes and consumption taxes and VAT and all other types of taxes in use today cause people to engage in all sorts of acrobatics to pay less in the way of taxes.  But the dead never change their behavior to avoid taxes.  Ever.  And if the pre-deceased want to give their money to their children or their friends or relatives or favorite charity, they can do so simply, out in the open, by passing on assets while they are still alive.

TLDR:  tax the dead, so the living can be taxed less.

A couple notes…

1. Is this essay meant to be taken seriously?  Sort of.  I believe the idea is mostly sound though I’m sure it would benefit from a bit more thought.  But do I think there is a snowball’s chance in Hades that such a proposal has legs?  Nope.  Most people like the “have your cake and eat it too” model, at least when they own the cake.

2. Parts of this post first appeared December 2006.  At the time I wrote it, I was unmarried, had no children and almost no assets.  Now my situation is different along all those dimensions.  And I have less hair.  But I like to think I am still just as adorable as I was back then.  Regardless, the other day I thought about the old post and I asked myself…  do I still feel the same way now that my situation has changed?  So I sat down to write…  and came to the same conclusion. The conclusion was so similar that I inserted a few sentences from the old essay into the new one as it fit quite well.  Is that bad or good?

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