Death and Taxes

Posted on March 14, 2012 at 11:24 am,

This is the next in our series of posts critiquing the arguments of Wayne Grudem’s book Politics According to the Bible. Today, we’re going to wrap up the section looking at taxation, by covering some specific taxes.

Taxes on inheritance

Grudem deals with the American estate tax (this is the same thing as Britain’s inheritance tax – and the points made apply to any similar tax), a tax on the estates of people who have died. He titles this section “The death tax (estate tax)”, which is a term often used by opponents of such taxes, because it makes it sound like it’s a tax on somebody dying, rather than what it actually is – a tax on the income and assets acquired from a dead person’s estate. Estates under a certain value (£325,000 in the UK, and $1,000,000 in the US – though this has currently been raised to $5,120,000 by laws that will expire in 2013) do not have to pay the tax. Estates over that value only have to pay tax on the amount over that value. The tax is levied before the estate is split, so that sometimes the executors might have to sell some of the assets (e.g. a house) in order to pay the tax.

Grudem’s first argument against the tax is that the money belongs to the deceased taxpayer and their descendants, rather than to the government or society, and that the government does not have the right to take it away. He justifies this by pointing to verses like Proverbs 13:22 and Proverbs 19:14, which show that inheritance was a normal practice in Biblical times, and Numbers 27:8-11, where God gives Moses instructions on how the money should be distributed. He claims that the fact that the Bible doesn’t mention taxes on inheritance is significant.

He also says that such taxes are a disincentive to entrepreneurship, because business owners will not work as hard if they can’t pass as much of their wealth to their families or the charity of their choice. He argues that large corporations benefit, as they often buy businesses that have to be sold off in order to pay the tax. He cites simulations run by the Tax Foundation (a right-wing think-tank) which showed that it has roughly the same effect as doubling the rate of income tax (which Grudem believes would reduce the size of the economy).

There are many counter-arguments that Grudem doesn’t address. On the question of whether the government has the right to tax a dead person’s estate, we’ve already seen that the Bible endorses the right of governments to levy taxes. When we looked at the question of private property, I said that the land in Biblical Israel was not to be treated as an individual’s property (as Grudem seems to think), but as property belonging to the tribe and family. Also, if we take Grudem’s view that the passages he cites are prescriptive, then there’s a good argument to be made against the practice of allowing people to write legally binding wills. On their death, their property should be split amongst their family, rather than them having any say in what happens to it.

Also, when we looked at the issue of economic equality, we saw that there were limits on any person or family accumulating too large a share of the ability to create wealth. In short, there’s nothing in the Bible that prohibits governments from levying inheritance taxes, and several things that seem to be in harmony with the idea.

The question of whether inheritance taxes act as an incentive to entrepreneurship is more hotly disputed. Firstly, under current UK and US laws, the vast majority of the estates will not pay a penny/cent in tax, so it shouldn’t play any part in the average person’s thinking. Secondly, those rich enough to pay it can almost certainly afford to pay an accountant to find loopholes that allow them to pass assets on before they die. Whilst the tax may have a disincentive on some kinds of work, any disincentive effect is not particularly rational – you still get to pass the vast majority of the fruits of your labour when you pass on, and if you want to ensure that your next of kin get at least a certain amount, inheritance tax might even encourage you to be that little bit more productive.

As to the research, Grudem cites, I hadn’t heard of the Tax Foundation before reading his book. but a quick look at Wikipedia shows that they have been accused of using poor methods in many of their published findings. As predictions in economics very strongly depend on the assumptions you make, I would have to have a lot more information about their model before I assume that it is correct.

Transaction Taxes

Grudem looks at proposals that some have made to replace the US Federal tax system with a sales tax (the equivalent to VAT in the UK), adding a certain percentage to the cost of every item. Grudem dislikes this for a number of reasons. Firstly, that it would require a very high tax rate. Secondly, he worries about the possibility of tax creep from adding a new type of tax, and the possibility that the other taxes would creep back in. He also expresses concern that this would place a much higher tax burden on poor people. He mentions the effect of abolishing existing tax exemptions for charities, worries that it would cause a black market in order to avoid the tax (and, hence,make society less likely to obey the law in general), and finally thinks that the revenue generated might not be as much as suggested (a good argument to ensure that any radical changes to the tax system are made gradually).

On this, I am pretty much in agreement with Grudem on the effects. I think he vastly overstates the potential of such a system to create a black market economy to avoid tax. The 20% rate of VAT in the UK hasn’t produced such problems on any large scale, but then it wasn’t introduced overnight.

Other Taxes

There are a whole range of other taxes that could be enacted, but which Grudem doesn’t comment on. Poll taxes (everybody pays a set amount), “sin taxes” (taxes designed to discourage certain activity – e.g. a tax on cigarettes), land/property taxes (like council tax in the UK) and carbon taxes are probably the most commonly used and/or proposed. There are, of course, an almost infinite variety of other taxes that could be enacted. Britain famously used to have a tax on the number of windows on a house.

Grudem doesn’t say anything that addresses these kinds of taxes. Hiss approach is to take some of the taxes currently in place at the federal level of the USA and comment on them. He doesn’t attempt to establish a coherent framework for his theology of taxation, and doesn’t really provide any guidelines for his readers to work out whether a particular tax (or proposed tax) is morally justified. That, combined with the tension between his agreement that the government has the right to levy taxes and his clear disapproval of every single tax he mentions are the real weaknesses in his treatment of the issue.

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