Tax the Dead!

One unorthodox proposal that caught my attention recently was Kevin Drum's call to “let the dead pay” for Medicare.

His idea is simple: If you run up a lot of medical bills before you die, Medicare would have the first claim on your estate, instead of your heirs. Not only would this be a great source of revenue, but it would also create an incentive for those in the last years of their lives to run up hundreds of thousands in medical expenses to prolong their lives. While this would not be a large enough source of revenue to be a cure-all, it is certainly a good idea.

In response to Drum's proposal, Megan McCardle considers whether inheritance is morally justified in the first place. Heirs, after all, are typically children or family. They did not do anything to deserve an inheritance. Inheritances are simply based on the luck of the draw, and they reinforce inequalities based on parental income that already create an uneven playing field for children raised in rich and poor households. McCardle, however, takes the case a bit too far by advocating a 100% estate tax rather than Drum's more modest proposal. Such a policy would create far too many practical issues, many of which McCardle discusses, to be a feasible tax policy.

But let's consider the many advantages of the "let the dead pay" estate tax. First, inheritances create a disincentive to work for their heirs. Why be productive when you have free money to count on? The estate tax would create a greater incentive for these potentially productive citizens to work. Second, the estate holders would be more inclined to create trusts or gift their earnings while they are alive. For example, individuals would be far more likely to create educational trusts for their kin or donate to a charity or political cause they are passionate about. Third, the estate tax is far preferable to other sources of revenue such as taxes on income, consumption, or investment because of efficiency gains. Investment taxes discourage savings; income taxes discourage work; consumption taxes are especially harmful because they are regressive and weaken the purchasing power of the working class. Fourth, the estate tax is morally just because it lessens the unfair advantage of being born into a rich family. Last, a "let the dead pay" estate tax would essentially function as a means-tested user fee, discouraging overconsumption of health or government services.

Owners of large estates certainly have the right to run up medical bills totaling hundreds of thousands of dollars, just not at the primary expense of taxpayers.

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