Tuesday, January 10, 2006

On Taxation

I participated recently in an interesting discussion about taxation and its fairness. Some of the participants were quite well off, and as winners in that game they called taxes on properties to "envy tax" and estate tax to "death tax", and generally dismissed all contrary opinions as leftist propaganda. While I definitely don't regard myself as leftist, intellectual honesty demanded me to oppose some of their views on taxation. Here's why.

Outside of social aspects such as evening out the income gap, taxes serve a simple purpose: share the cost of common purchases and thereby obtain savings in scale. For example, if we wish to have a state where people needn't hire private armies to defend our borders and guards to keep our property safe, we gather a sum of money through taxes and hire a common army, police force, legislature process, courts of law, and prison system which exercise a monopoly of violence within our borders. (Incidentally, that is what defines a state.) Currently almost all of that system is paid by income and value added tax as they form an overwhelming majority of our budget's income.

But now consider who has most to lose if the army, police force, law, and criminal system would cease to exist. Rampant theft and vigilantism would follow. Except for our lives, what do we have to lose? Yes, our property! Eventually our society would degrade to stone age where no-one could safely own more than he could carry with him, guard with sight and hearing and run to protect before the thief is gone. So the ones that benefit most of our costly system for maintaining safety and order are the ones who own a lot of properties (land, buildings, valuables, money, shares, promissory notes, whatever). However, property tax pays only a negligible fraction of the costs associated with protecting the properties of people, and it is now being lifted altogether. I don't see the fairness in that.

Estate (inheritance) tax is argued againts by calling it multiple taxation, as the same property is taxed first when the deceased earned it and a second time when it is passed on to the children. However, this argument doesn't hold for two reasons: Firstly, why should property in estates not be taxed when they change hands while essentially all other exchanges of ownership is taxed? Secondly, the one who pays the estate tax is the recipient of the estate, not the deceased, so there's really no double taxation occurring at all!

In my view estate tax can be used to replace property tax simply because everybody dies some day, and whether the taxation is done after death or while living is irrelevant. Therefore now that property tax is removed, estate tax should be sufficiently large to cover a fair share of our common infrastructure that protects property. Nevertheless, in my mind property and estate tax carried by the Finnish state should roughly equal the sum consumed by the interior, defence and justice ministeries, or roughly 5 billion euros.


Blogger Vera said...

I think some of the opposition to estate tax is emotional. I for one find something unspeakably ugly about the state demanding money from grieving relatives. The words "grave robbing" come to mind.

The weird thing is that most of the people I know who support the estate tax say that it serves to prevent money from accumulating in families and puts it back into circulation. I would say that the current estate tax, with vastly different tax rates depending on the relationship to the deceased, strongly discourages people from leaving their money to anyone who is not immediate family.

11:55 AM  
Blogger cessu said...

Wouldn't inheriting relatives be "grave robbers" according to the same logic? In general I don't understand why inheriting something valuable shouldn't be treated as any other kind of income which is also taxed?!

The most significant problem with current estate tax is that it is necessarily paid in money, and so rapidly that there is not enough time to sell the inherited properties. Liquid properties, such as land and shares, should also be payable as such. The minimum taxable property could also be raised to the level that corresponds to a typical home if the heir doesn't have one of his own. And perhaps most significantly, heirs should have the right to reject any part of the estate - now they have to accept it entirely or not at all.

In my original post I deliberately restricted out of my treatment the political aspect of evening out the wealth gap and economical aspects such as stagnation caused by too much properties outside active circulation and productive use.

There are ways of reducing estate tax when leaving something to non-relatives, ranging from adoption to asking the government to lift estate tax for certain properties and heirs. The latter is used, for example, when foundations inherit properties or when museums (public or private) inherit art or antiques.

1:08 PM  

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