Mirror of Justice

A blog dedicated to the development of Catholic legal theory.
Affiliated with the Program on Church, State & Society at Notre Dame Law School.

Tuesday, December 28, 2010

Help Needed!

My feeble brain is tired as we prepare to close out the year, and I need your help with two issues from the lame duck Congress.  

First, Congress recently extended the Bush tax cuts for everyone including the highest earning Americans on the grounds that many of these  "wealthy" Americans are small business owners who will react to higher taxes by not hiring and expanding their businesses. But, wouldn't higher taxes likely have the opposite effect on small businesses?  I am not advocating higher taxes for anyone, but I am puzzled by this rationale.  With higher taxes the small business person has two options - give more of their earnings to the government or invest in the small business by hiring and expanding.  The third possibility - taking that money home is not an option with higher taxes.  Am I wrong in my analysis?

Second, the estate tax.  Doesn't the existence of an estate tax provide incentive to wealthy people to dispose of their assets in their life times?  And, might this be a good thing?  Again, I am not arguing for an estate tax, but I would like to hear arguments about why it is a bad idea?

Thank you in advance for your thoughts.


Scaperlanda, Mike | Permalink

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Prof. Scaperlanda:

Higher taxes do not present the small business owner with any options at all. The government simply seizes more money.

Lowering taxes means that more money is available for the small business owner to either take home or reinvest in the business. Assuming that the small business owner always puts some fraction of the money back in the business, then lowering taxes will increase that reinvestment. Further, if having higher income gives the small business owner more confidence in his or her financial position, the percentage reinvested might also increase.

The premise of the question seems to be that reinvestment is done with pre-tax income, and while some deductions are available for certain expenditures in the present tax year, most reinvestment is with post-tax dollars.

As to the estate tax, I don't think the burden should be on those who oppose it. Rather the natural position is one where there is no estate tax and the taxers have the burden to argue why there should be one. I would submit there are not any principled arguments for the estate tax. Inter vivos transfers incur taxes also (except for gifts, but those are limited annually), so maybe I just don't understand the premise here.

Posted by: John Jenkins | Dec 28, 2010 9:46:46 AM

Seeing as the Estate Tax is estimated to affect only 44,200 estates, I fail to see why its existence is such a big deal.


By itself, it would bring in five times the amount of money needed to fund the original First Responder Health Care Bill (6.2 bn).

Posted by: wj | Dec 28, 2010 9:57:41 AM


I'm not sure there is reason to think the "natural position" is one where there is no estate tax unless one is an uncritical libertarian. There is no natural way of dealing with your stuff when you're dead; in any case it is redistributed to other people. The question is whether that redistribution should be left to the state, to the deceased, to the larger community through some mechanism other than the state, or to some combination of the above. Because I am highly skeptical of far away authority -- including the federal government -- and its ability to properly discern the common good, it turns out I would prefer some kind of combination of redistribution decision-making between the deceased and the local community/local government. But there is nothing natural is my preference other than subsidiarity. Once the deceased has left enough to provide for his family, there is nothing per se natural in their keeping the rest.

As for an argument in favor of the estate tax, how about the fact that large amounts of unearned wealth is detrimental to personal virtue (actually, I think for the most part, wealth is in general, but there is still justice in letting someone who has earned the wealth keep its fruits). Children who know they will inherit a lot of money have far fewer incentives to better themselves or cultivate skills or contribute to society. And I realize that it is not necessarily the government's job to worry about things like that, but from a Catholic perspective can we really say for certain that it isn't?

Finally, is your assertion about pre-tax income correct? I only took one tax class, but from what I recall, money earned that is spent in that year on the business -- expanding, paying employees, etc -- is not subject to a deduction but isn't taxed at all because it isn't profit. It was a while ago, so I could be wrong, but I'd certainly at least question that assertion of yours.

Posted by: Chris | Dec 28, 2010 10:48:17 AM

The rationale for the estate tax is to prevent perpetual estates and to prevent the evolution of a similarly perpetual class of the hereditary rich. The natural way to accomplish this is to have some floor, below which estates are not taxed, and a very high tax rate applied to everything above that.

The estate tax as it is implemented in America is actually quite ineffective because the law of trusts allows families to escape it. The trick is to create a family trust -- a holding company for the family's assets -- and to give the members shares in the income from the trust. Those shares can take the form of life interests in some physical assets, like homes. Since the trust never dies, there is no issue of an estate.

The effect of the family trust seems to be very bad, because it systematically severs the link between work and life. It is a formula for training wastrels who live in perpetual dependency on the trust. Not all the descendents fall into that trap by any means, but it is not a good thing. At least hereditary estates were like a family business, that required continual effort and management to serve from generation to generation.

Posted by: Joel Clarke Gibbons | Dec 28, 2010 12:51:32 PM

I am not well versed in the economics of taxes, but it seems to me to be obvious that money taken from the wealthy by way of taxation has one effect: taking money that would have been invested in the private sector through the purchase of stocks, bonds or certificates of deposit, and placing that money into the (horribly inefficient) hands of government.

Posted by: Dan | Dec 28, 2010 12:58:44 PM


What you say is not *necessarily* true (but can of course be true in some circumstances). Empirical evidence suggests, in fact, that the trickle-down thesis behind the claim that private investment left to the rich is *always* better for the economy of a whole is false. A relevant article:


Posted by: wj | Dec 28, 2010 2:11:19 PM

1. If my bishop taxed my parish I would have to lay off staff to cut costs.

2. My savings have already been taxed. It is my money, not the governments. I should be able to dispose of it to my family or as I wish. They have had their bite.

It is OUR money. Not the governments. We don't work for them. Reagan cut taxes and increased revenue because it helped spur the economy. Under Carter the highest bracket was 70% and they said if they lowered it they would get less. That didn't happen. We need substantial reform of government spending, including entitlements.

Posted by: Fr. J | Dec 28, 2010 2:50:29 PM

Thank all of you for your comments so far. As I said in my post, I am not advocating higher taxes.

1. If John Jenkins assumption is correct that most small business investment is done with after tax dollars, then I agree with him. But, is that assumption correct? Like Chris, I question that assumption. Fr. J., you would only have to lay off employees if the Bishop taxed your gross intake. If your Bishop taxed your net intake (gross revenue minus expenses) and you wanted to keep money out of the Bishop's hand and you also wanted a full time organist, your Bishop's decision to tax you might actually provide an incentive to hire the organist, raising your expenditures and decreasing your net revenue. Right? So, with respect to my question, it really comes down to whether my assumptions or John J's assumptions are correct. Even if my assumption is correct, it still might be unwise, as Dan points out, to raise taxes on the wealthy because of the loss in passive investments - that is the debate between Dan and wj.

2. With respect to the Estate Tax, I am not suggesting that the government ought to get this money. But, Chris and Joel make powerful arguments for having mechanisms in place to limit intergenerational transfers of mega-wealth. If Chris and Joel are correct about this, what sort of incentives/penalties ought to be in place to limit intergenerational transfers of mega wealth?

Posted by: Michael Scaperlanda | Dec 28, 2010 3:54:51 PM

Wonderful window on the issue of principles and values.

WJ has analyzed the situation fairly accurately in a pithy manner. Issues related to motivation and analysis of risk and reward are important as well, i.e. if the taxation rate lowers potential reward, the risk involved in the venture may no longer make sense. Production plummets.

Our current national situation reflects risk and reward uncertainty. Corporations are unwilling to spend as they cannot calculate risk/reward in an uncertain government climate (caused by the Obama administration). Regulation, confiscatory tax policy, and bad fiscal policy make it difficult to conduct business.

It is interesting that other posters believe it is right to use coercive power to confiscate the possessions of some people and redistribute them to others. When this becomes common talk, morals and ethics have broken down. We are on the brink of collapse and a period of "official" looting.

When people realize they can vote themselves a handout, democracy is finished and we will see harsher forms of government that trample on life, liberty, and the pursuit of happiness.

Those who produce and exchange and participate in the economy begin to see the added risk presented by a government of gangsters. They may decide it is not worth engaging in economic activity given the high risk of an out-of-control confiscatory government, such as the Obama administration presents.

We simply have to look at Russia and Mexico and Greece to catch a glimpse of where we are headed with this type of thinking.

Posted by: Greg | Dec 28, 2010 8:18:11 PM

The right of the civil authorities to use taxation to transfer money from the rich to the poor is pretty widely accepted by, among others, the Catholic Church. There remains nonetheless as issue of how to do it. Two questions arise: how to levy the taxes and what to spend them on, for the benefit of the working class.

As for the latter question of how to use the proceeds, we agree that bread and circuses is not the best way. Many welfare-like schemes are really paternalism more-or-less in disguise and are wrong in themselves (malum in se). The Holy Father condemned them recently. While a welfare floor is needed and justified, as much as possible the state should invest rather than spend, using its levies to pay for education and public roads, for instance. The best "welfare" is to make it possible for everyone to earn his own daily bread.

The best way to levy taxes is a matter of ongoing speculation and research. In former times, businesses and farms were the property of rich individuals, entrepreneurs, who both owned and directed them. It was wise and indeed necessary to leave them to future entrepreneurs, the heirs of the current owners. Thus, inheritance taxes would be counterproductive.

In these days big business is the province of impersonal corporations which do not have a predetermined life cycle. Shares in the ownershiop are fully transferrable, and do not correspond to managerial responsibilities. For that reason it is feasible to tax estates highly, because it can be done without disrupting the operating and investment decisions of the business organizations. Where this is feasible, it is also probably wise. It is part of the kind of egalitarian "middle class state" that Thomas More described in his Utopia.

There is however a serpent in this garden too. All over the world we are joined in a vast experiment in which we are testing the viability of the modern corporation as an economic institution. The demise of GM is a clear indication of the issues at stake. GM was created by the genius of Alfred Sloan, the great manager whose ideas defined the corporation. He left automotive engineering to his rival Henry Ford. It was Sloan who figured out how to make the corporation work. So when his corporation succumbed to the diseconomies of the corporate form of organization, it was not just another failure.

I tend to agree with Andrew Carnegie that inherited wealth is a malum in se and a handicap to those who receive it. I have three children and six young grandchildren (only one of them is even in high school). Since they started in school in 1975 I have laid out about $450,000 toward their education. Now they can make their own way in the world, without having to depend on any inheritance. On the other hand, honesty demands that I point out that I recently inherited just about that sum from my father's estate, so we're even.

Posted by: Joel Clarke Gibbons | Dec 29, 2010 9:13:16 AM

Not directly on point, but certainly germane to some of the animating presuppositions and assumptions in this thread, see Strand, Palma Joy. "Inheriting Inequality: Wealth, Race, and the Laws of Succession" (August 24, 2010). Oregon Law Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1664564

Posted by: Patrick S. O'Donnell | Dec 29, 2010 10:10:41 AM


I read the Abstract for that paper. The idea that laws governing inheritance are racially biased is absurd. There are plenty of rich black Americans. More broadly, it is a legitimate function of the civil law to open opportunity for all, but it is manifestly unjust for it to impose equality of wealth, or to treat wealth honestly acquired as an evil. The author's complaint is simply that white Americans -- whatever that means -- have a lot of valuable assets and black Americans don't.

Assuming her statistics are accurate, which I am inclined to doubt, to address that by direct wealth transfers is wrong. First of all it corrupts the government because it makes blacks and whites enemies fighting over the assets.

Posted by: Joel Clarke Gibbons | Dec 29, 2010 10:52:11 AM

A more generalized examination of the regnant presuppositions and assumptions is found in Liam Murphy and Thomas Nagel's book, The Myth of Ownership: Taxes and Justices (New York: Oxford University Press, 2001).

Posted by: Patrick S. O'Donnell | Dec 29, 2010 12:38:38 PM

erratum (book subtitle): Justice

Posted by: Patrick S. O'Donnell | Dec 29, 2010 1:12:24 PM

I'm uncertain what this language is of "we" and "our" set opposite of "the government." "We" are the government in America. No opposing force is seizing "our" money. If you wish to live akin to a hermit on an island there are plenty of choices in this world to that. But, assuming you do wish to live a social rather than a solitary life, everyone is going to have to contribute the blessings that have been made available to them. Where we draw the line between the needs of the community versus the disincentive of not pulling one's own weight is a perfectly fair question - some portion is due to hard work and personal initiative and some to pure blind luck. But whether those who accrue outsized benefits from our economic system have to contribute outsized tax payments back is NOT a fair question.

We also have some language about how inheriting vast sums of money tax free is a "natural" thing. How would isolating the least deserving, whimsical event of chance this side of lottery winning to be one of the few events that is free of taxation is anyone's guess. My best speculation is that some analogize it to a spouse taking a marital estate tax free. I would note only that the legal basis for marriage, combining economic benefits alongside economic duties, is quite distinct from that of any person and their heirs.

I'm told "death taxes" poll poorly. I believe this is due in part to the fact that the revenues generated are undifferentiated, accruing to the general treasury. I suspect that if such taxes where earmarked solely to supplement Social Security that most persons, weighing in the balance the elimination of the 1:1,000,000 chance of "winning big" versus spending their elderly years eating discount cat food, will be better disposed to the "natural" event of taxing unearned and undeserved massive financial windfalls ... just like everything else is taxed (including lottery winnings and gambling proceeds).

Sorry, but rather than discouraging initiative, estate taxes encourage people who desire to leave a large estate to their heirs to work all that harder. I analogize it to what they used to say in intellectual property (before they did away with the whole "limited time" protection business): the greatest source of inspiration to an established and well-off artist is the thought of a rapidly approaching copyright expiration!

Posted by: Jimo | Dec 29, 2010 11:28:03 PM

News is really superior about the Congress who recently extended the Bush tax cuts for everyone,although the post is also useful.

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Posted by: Dissertation writing help | Dec 30, 2010 12:07:28 AM

Two things:

1. The natural position is no estate tax because the estate tax doesn't magically spring into existence ex nihilo. Someone has to enact it. The number of people subject to it doesn't matter. See, e.g., "The Lottery," for an illustration why.

2. Since all income is subject to the income tax, and there are only limited deductions for business expansion (like ยง 179 deductions), it follows that business investments are mostly done with after-tax dollars (most such expenses are capitalized, some are deductible, most are not creditable).

There are some incentives (like the current special treatment for small business investments in "C" corporations that are held for more than five years), but they are prospective, not retrospective (that is, the investment itself is made with after-tax dollars, even though there is prospective beneficial treatment).

Posted by: John Jenkins | Dec 30, 2010 10:31:49 AM

All the highfalutin rationalizations notwithstanding, the "rationale" for the estate tax is simple: They got it, we want it, let's take it!

I mean, really, what's so bad about intergenerational transfers of wealth anyway? Isn't it a good thing for parents to forego spending, and to give to their children (and grandchildren)? Don't we want to encourage that? Is it really for outsiders to say, "you've given your children too much, so we're taking some of it, so there!" Does anyone deny the desire for the estate tax is borne of envy?

Posted by: Mark | Dec 30, 2010 11:50:15 AM

"First, Congress recently extended the Bush tax cuts for everyone including the highest earning Americans on the grounds that many of these "wealthy" Americans are small business owners who will react to higher taxes by not hiring and expanding their businesses."

Wow, I didn't think anyone really believed that. This is from business week,

"McConnell's 50-percent-of-income figure is based on a July 12 finding by the Joint Committee on Taxation, a House-Senate panel that analyzes tax issues, that half of about $1 trillion of business income in 2011 will be reported on some 750,000 personal tax returns filed by people who pay the top marginal rates. He calls those small businesses. Yet the report says the data "do not imply that all of the income is from entities that might be considered 'small.' " Almost 20,000 of those businesses, for example, had receipts of more than $50 million, it says."

"Besides Obama, McConnell's 50 percent figure includes authors, actors, athletes, and others who employ few if any workers, as well as hedge fund firms and major law partnerships most people wouldn't consider small. "We are being over-inclusive in our use of small business income," says Edward D. Kleinbard, a former staff director of the Joint Committee on Taxation who is now a University of Southern California law professor."


This was fairly well reported in quite a few venues. As the tax cuts would have remained for everyone up to 250k and that is taxable income, actual income would likely be higher. For every 100k over the 250k (and remember that is taxable income not gross) one would pay an extra $4,000 or so. Do you really believe a person capable of generating and extra 100k in income refrains from doing so because their taxes on that 100k will be $39,000 instead of $35,000?

"My savings have already been taxed."

And folks who pass on "savings" usually have estates well within the exemption level. Really wealthy people pass on assets like stocks and real property whose appreciation hasn't been taxed and whose basis is adjusted to current market value.

If the estate tax was eliminated and the basis adjustments were retained the appreciation would never be taxed. Otherwise capital gains would be applied. The downside is that either way, given the low rates on capital gains, we wind up creating a wealthy aristocracy.

Posted by: al | Dec 30, 2010 10:17:31 PM