In the first part of this two-part essay, we examined the principles of Biblical inheritance, including the incentives that a Biblically- managed inheritance creates for Biblical, unified family life. In this part we will take a look at one of the ways statism has weakened the family — heavy taxation.
Taxation and the Decapitalization of the Family
Despite all the rhetoric from politicians about "family values," the state today is carrying out what amounts to an all-out offensive against the institution of the family. The state has attacked home schooling, mocked parental authority and Biblical morality in the public school system, set up welfare systems that encourage single-parent homes, threatened parents who discipline their children with corporal punishment, and much more. Individuals who physically attack the family, such as murderers and rapists, are given shamefully light sentences, and (in the case of abortionists, for example) are even vigorously protected by the state.
Long before these audacious recent assaults began, however, the state began undermining the family through taxation. A fundamental part of the state's aggression has been to decapitalize the family and thus deprive it of the financial resources necessary to perform vital functions. With around half of the average family's marketable output going to the civil government, the family is crippled when it comes to fulfilling the traditional economic roles of school, welfare agency, lending institution, and venture capitalist.
Inheritance Taxes and Family Capital
Early twentieth century egalitarianism and the expenses of World War I contributed to one of the most direct tax assaults on the family — estate, inheritance, and gift taxes.1 Though these taxes are avoidable with planning, and recent legislation has tempered their impact, these taxes should not be ignored as having contributed to family breakdown, intergenerational tensions, and massive wealth destruction.
Recently, the federal government began to increase the amount of an estate excluded from estate taxes, and to decrease the tax rates. The exclusion is now $1 million and is supposed to increase substantially over the next few years. (The change was long overdue, as inflation had eroded the original exclusion.) The federal estate tax is supposed to be eliminated entirely in 2010.2 This is a great victory for the financial integrity of the family. However, a recent bid to make the 2010 repeal permanent was narrowly defeated in the Senate on June 12, 2002. Therefore, unless estate tax opponents can regroup, the tax will be reinstated in 2011 with the old exclusion of $1 million.
There are two primary ways that estate taxes break down the institution of the family. First, the estate tax renders ineffective some of the important financial obligations that preserve and solidify parent-child relationships. Second, these taxes foster misplaced, short-term investments, since the taxes create incentives to divert family resources to tax-deductible charities and foundations.
Estate Taxes and Family Disunity
Estate taxes disrupt the Biblical incentive structure by encouraging filial disloyalty and misbehavior, and by removing much of a parent's power to transfer intellectual capital to a child. The ability of the parents to impose consequences on bad behavior is seriously compromised, and children grow up ignoring their obligations toward their elders. It's no wonder so many elderly people in this nation are neglected by their children and grandchildren and left to the care of complete strangers. Children are growing up isolated from their elders, ignorant of their family heritage, and disrespectful of the beliefs and traditions their parents and grandparents hold dear.
Rather than honoring their parents and grandparents, children seek the favor of government bureaucrats. After all, whatever family wealth remains after decades of predacious income taxation is snatched away by the state through estate taxation, and it is to the state that the children must appeal if they wish to see their inheritance. By siphoning power away from the family, civil government becomes even larger and freedom is lost. Politicians, not parents, receive the respect and adulation of the younger generation.
Estate Taxes and Investment Choices
Estate taxes also create incentives for the bequesting generation to divert resources to non-profit organizations rather than to their own families. Thus, these taxes encourage the decapitalization of the family in favor of groups satisfying the government's 501(c)3 requirements. There are quite a few worthy endeavors among these tax-favored organizations, but bequestors may well prefer to build up a family capital base for children, grandchildren, and later generations.
Estate taxes, therefore, penalize forward-looking families. This sends repercussions throughout the whole economy. Not only do these taxes discourage the long-term investment necessary for a high level of economic growth, but they prevent families from accumulating, over several generations, the resources required for starting a family business or for preparing for uncertain times ahead. The short-term focus that estate taxes force onto families may result in a lower standard of living for everyone in the long run.
In his 1942 book Capitalism, Socialism, and Democracy, the great economist Joseph A. Schumpeter remarked that in the free-market system, the long-run interests of society depend upon the "family motive" certain people have to accumulate wealth for future generations. This businessman-investor class works not so much for consumption as for the building of family capital over generations. The civil government, however, takes a short-run view and seeks to tax this accumulated wealth away from families, with disastrous results:
With the decline of the driving power supplied by the family motive, the businessman's time-horizon shrinks, roughly, to his life expectation. And he might now be less willing than he was to fulfill that function of earning, saving and investing even if he saw no reason to fear that the results would but swell his tax bills. He drifts into an anti-saving frame of mind and accepts with an increasing readiness anti-saving theories that are indicative of a short-run philosophy.3
This philosophy, Schumpeter continues, can lead to ineffectiveness and apathy among businessmen, which "decomposes the motor forces of capitalism from within."
Some claim that government confiscation and redistribution of bequests is necessary in order to maintain income equality. Karl Marx and Friedrich Engels, in The Communist Manifesto, made plain that the "abolition of all right of inheritance" was one of ten essential measures for equalizing the distribution of capital and making the State the supreme power in society.
Estate and inheritance taxes persist at the state level, and even under the 2001 repeal plan, gift taxes will continue after the federal estate tax is eliminated in 2010. All of these should be abolished. It certainly should be a priority to resume the effort to see that the federal estate tax stays dead after 2010.
Taxes and Long-Term Family Capital
Estate taxes may be one of the most direct attacks on family capital, but other forms of taxation can actually have a more insidious, and more powerful, impact. All taxes limit the family's ability to build up capital for succeeding generations. It is not only the estate tax that can create disunity within the family and encourage the diversion of family wealth. Income taxes, property taxes, Social Security taxes, and taxes of every other sort have the potential to hinder the family's ability to handle its traditional economic functions. By draining capital from families, taxes force reliance upon extra-family resources for business start-ups and expansions. Also, heavy taxation makes it difficult for the family to perform welfare functions, as the family reserves are depleted and significant relief of the family's poor or afflicted becomes more difficult.
The state may collect taxes for the performance of its Biblical duties. The Bible states this unambiguously in Romans 13:6-7. Yet it is important that the method, and the amount, of taxation not undermine the family. We will not delve into the debates over tax methods here. It seems clear, however, that estate taxation deprives the family of a key institutional support, and weakens the entire structure.
Family Wealth and the Family Welfare System
R. J. Rushdoony wrote that the family is "the major welfare agency of all history with its care of old and young, relatives and friends, and its assistance to members of the 'nuclear' family."4 He argued that it was the family, more than the state or even the church, that was the most important institution in society and the primary source of relief for the needy.
It is only within the context of the family that the providers of assistance can gain accurate and comprehensive information about the needs of the recipients. There is no way a state bureaucrat can know all the relevant details of the complex situation that has led to a person's welfare application. Nor does the bureaucrat have an incentive to inquire. After all, it is taxpayer dollars he is handing out. Family-oriented welfare is fundamentally different. The check-writer is more completely aware of the recipient's situation and has an incentive to refuse support if the recipient is unwilling to take steps that might solve the problems leading to the financial distress. Also, while the state bureaucrat does not know or care about the moral state of the recipients, family welfare must take this into account so as not to pass on family wealth to the unrighteous.
Most families today are not in a financial position to provide substantial support for needy family members or friends. Think of what it would take for the family to take over the role of providing for the temporarily unemployed. Most people will find a new job within 12 weeks of losing their old one, and in most years nearly half of all jobless people are out of work less than 5 weeks. For someone making $45,000 a year after taxes and tithe to maintain 85% of their normal spending for 12 weeks with no current income, about $8800 would need to be set aside in liquid assets. For someone netting $30,000 a year, it would come to around $5900. It is not an impossible sum to accumulate, it would provide a small amount of interest income, and it involves no expensive state bureaucracy to administer an unemployment insurance program. Yet how many families can say that there is an appropriate amount set aside in reserves for every worker? Were it not for high tax rates, family reserve funds would be much easier to accumulate.
The State vs. the Family
The family has always been a more influential institution in human society than the state. Craving this power, the modern government is attempting to supplant the family by being a parent to every child and a child to every parent. The good-faith efforts of parents to provide for, educate, and discipline their children (and later generations) are thwarted by government bureaucrats who imagine themselves to be better than natural parents. The children, as subjects of this gigantic government parenting experiment, are trained to believe that government can easily fulfill any function of the family, and they dutifully turn over the responsibility for their aging natural parents to politicians. When the government takes this role, it has become the de facto heir to the parents' fortune.
However, Biblical societies will protect the intergenerational transfer of wealth, recognizing that inheritances enable families to fulfill their mutual responsibilities to one another. As parents provide for their children, and children for their aging parents, the family — and therefore all of society — is stabilized and preserved. We must remember, too, that a spiritual inheritance is of far more value than a physical inheritance, and that gift to one's children can never be taxed away.
1. Inheritance taxes are imposed upon the beneficiary; estate taxes are paid out of the decedent's estate before wealth is passed on. Gift taxes are legally unified with estate taxes. The consequences are similar, though inheritance taxes may be worse because beneficiaries are more likely to be forced to liquidate property in order to pay the tax. The federal government does not impose inheritance taxes. Estate taxes are much more common than inheritance taxes in state law.
2. The gift tax is to be retained, with a $1 million lifetime exclusion.
3. Joseph A. Schumpeter, Capitalism, Socialism, and Democracy, 161.
4. Rousas J. Rushdoony, The Institutes of Biblical Law, vol. 2 (Vallecito, CA: Ross House Books), 1986, 131.
- Timothy D. Terrell
Timothy Terrell is associate professor of economics at Wofford College in Spartanburg, South Carolina. He is assistant editor of the Quarterly Journal of Austrian Economics and is an Associated Scholar with the Mises Institute.