Why Inheritance Taxes Generate So Little (and Wealth Taxes Will Underperform, Too)

I sometimes wonder what planet academic pundits are from. In an op-ed in the Washington Post Lawrence Summers and Natasha Sarin express skepticism over the amount of government revenue that can be derived from wealth taxes:

Sen. Elizabeth Warren (D-Mass.) recently proposed a 2 percent “wealth tax” on those worth more than $50 million. Emmanuel Saez and Gabriel Zucman, economists at the University of California at Berkeley, have played a major role in developing and validating this proposal. They estimate that the tax would raise $187 billion in 2019 (Warren’s additional 1 percent “billionaire surcharge” brings their total revenue estimate to $212 billion). This represents a substantial sum and has been widely quoted in both academic and policy discussions of wealth taxation.

Saez and Zucman are perhaps the world’s leading experts on wealth statistics, but they have not previously been involved in tax-revenue estimation. One of us (Summers) has often been struck by how much his judgments regarding tax revenue based on published economic statistics have differed from those of professional revenue estimators. So it seemed a worthwhile exercise to estimate the proposed wealth tax revenue based on actual tax revenue data.

Here’s the part that caught my eye:

We reasoned as follows: The existing estate tax is a wealth tax levied at the time of death. If 2 percent of wealthy families experience a death and intergenerational transfer (rather than a spousal transfer) each year, then the current 40 percent estate tax should roughly be the equivalent of a wealth tax of 40 percent multiplied by 2 percent — or a 0.8 percent wealth tax — assuming equivalent definitions of wealth and the same threshold for taxation. Since most wealth is held by fairly elderly people, and the mortality rate of 70-year-olds is above 2 percent, we suspect that 2 percent mortality is a conservative estimate. So the actual wealth-tax equivalent of the estate tax is likely greater than 0.8 percent.

Their assumptions are completely wrong. The wealthy have strategies to avoid having their wealth be subject to the inheritance tax. The greater the wealth, the more strategies are available. The only wealthy people who pay inheritance tax are those improvident enough not to have made the necessary arrangements. They’re estimating based on the number of those eligible rather than the number who actually pay.

The same will be the case with any realistically conceivable wealth tax. There will be ways to avoid it and most will avail themselves of them. The richest will be able to avoid them with the greatest facility.

How could the authors possibly not know that? As I have pointed out any number of times, economics is a science of human behavior. How can you make pronouncements about economics without knowing how people will behave?