JOHN HOOD: In Tax Code Reform, Here's a Gift of Common Sense
There are many sensible goals in state tax reform. But if anyone is unsure where to start, I suggest that they zero in on places where the tax code isn't just inefficient or unfair, but blatantly nonsensical.
The General Assembly just acted in one such area: gift taxation. In the 2008 budget bill, lawmakers agreed to repeal the tax as of January 1, 2009. Budget officials estimate that North Carolina's tax, one of only four state gift taxes left in the country, nets the treasury about $18 million a year. In fact, it's not even clear there is a net revenue gain for the state, given the economic distortions that gift taxation creates.
It's related to the larger debate about estate and inheritance taxes. The logic behind gift taxes is that if the government taxes transfers of wealth at death, individuals with substantial assets will attempt to evade taxation by giving away assets to family members before passing away. So the government should tax those gifts. But asserting logical relationships among flawed premises will always yield flawed conclusions.
For one thing, this case for gift taxation assumes that the tax system should be used to punish thrift or redistribute wealth. These are Keynesian and Marxist sentiments, respectively.
Keynes taught that saving was bad for the economy because it reduced aggregate demand for goods and services. Because higher-income individuals tend to save more of their income than lower-income individuals, the government ought to use the tax system to discourage saving and put more money into the hands of lower-income folks who'll spend it -- and thus prop up the consumer economy. Or so the Keynesian argument goes.
Keynes was, to put it charitably, off his rocker. Savings would only have the economic effects he theorized about if it consisted of greenbacks and bullion residing in someone's mattress. In reality, people now save by depositing funds in banks, plowing money into their own businesses, or purchasing stocks, bonds, real estate, and other assets. These actions shift the demand for economic production, rather than reducing it. Instead of consumers using the money to buy finished goods, the companies receiving the investment may purchase new machinery or develop new distribution channels, which must themselves be produced using labor and other resources.
Savings and investment don't hurt an economy. They boost an economy in the long run by financing the expansion and maintenance of its capital stock.
As for the appeal of wealth-redistribution socialism, it's really pretty limited when spelled out in plain English. That's why most Americans oppose wealth taxes at death even though most of them don't have enough assets to reach the taxation threshold. The idea doesn't seem to be just. Death-tax proponents have learned to change the subject by arguing that it's unfair for heirs to gain "unearned" income -- but that does explain why it's fair to dictate to those who earned the income that they must leave it to strangers rather than family.
Even if you buy the principle that the tax code ought to try to confiscate wealth, that doesn't mean it will succeed.
What the entire thicket of estate, inheritance, and gift taxes really does is sustain an industry of accountants, financial planners, and lawyers who help wealthy people structure their assets to minimize their tax burden.
With regard to North Carolina's gift tax, the pros have been telling individuals for years to establish a domicile in another state with no tax and then structure their gifts, trusts, and insurance to avoid triggering a taxable event.
That's why it's not even clear the repeal of a state gift tax generating $18 million a year will actually cost the treasury that much, because North Carolinians will now have less of a financial incentive to game the state's tax code, resulting in higher property and income-tax receipts.
Using government to steal from the rich to give to the poor -- or steal from the poor to give to the rich, as with excessive sales and excise taxes -- is foolish as well as unjust.
Hood is president of the John Locke Foundation and publisher of CarolinaJournal.com.
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