In today’s New York Times, economist Richard Thaler writes that “it is incorrect to say the estate tax amounts to double taxation. The wealth in many large estates has never been taxed because it is largely in the form of unrealized – therefore untaxed – capital gains.”
It’s Thaler who is incorrect. John Stuart Mill first and famously pointed out in 1848 that, because under an income-tax system any invested funds that yield capital gains were already taxed as income when earned by households, to tax the resulting capital gains is double taxation.* Or as University of Southern California law professor Edward McCaffery explains, “Income taxes, by their very nature, run into John Stuart Mill’s noted ‘double tax’ criticism when it comes to savings, because an income tax falls both on the initial receipt of wealth and on the subsequent yield to savings, that is, nonconsumed wealth. Savers are taxed more heavily than spenders.”**
Regardless of the merits or demerits of an estate tax (which tax, by the way, was supported by Mill), it’s mistaken to claim that, under an income-tax system, wealth in the form of unrealized capital gains has not been taxed.
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* John Stuart Mill, Principles of Political Economy (1848), Bk. V., Ch. 2, para. 22.
** Edward J. McCaffery, “Good Hybrids/Bad Hybrids,” Tax Notes, June 2005.
