Taxes on Wealth and Savings
Most taxes are on income or sales, and so they are at least marginally calibrated with an individual's cash flows. The exceptions to this are property taxes and inheritance taxes. These two taxes both go after an individual's savings -- property taxes mainly on the home, the primary savings vehicle for most Americans, and inheritance taxes on everything you've saved when you die.
Lets take property taxes first. Many people complain that modern life has become a treadmill, forcing families to work harder and harder to keep up their lifestyle. To a large extent, I think this is a myth - people may be working harder but their effective standard of living is way, way higher than say 30 years ago. But one of the things that definitely creates a treadmill are property taxes.
Many people have worked hard to pay off their mortgage, thinking they could settle down into their retirement in a paid off house. Unfortunately, they may find that their home has increased in value so much that their property taxes at retirement are actually much higher than their original payment on the house. Take the case of a couple who bought their house in an urban area for $25,000 and find its now worth $375,000 forty years later (this is an average urban price increase over the last 40 years). For simplicity, we will assume the effective tax rate has stayed at $1.50 per $100 for these forty years (though its more likely to have gone up). In 1965, they paid $375 a year in taxes. Today, they have to pay $5,625. In other words, their property taxes today are over 22.5% a year of the original price they paid for the house. Now, this is all fine if the couple strove to work up the corporate ladder and get promotions and grow their income proportionately. But what if they didn't want to? What if they just wanted to buy that house, pay it off, and live modestly selling driftwood sculptures at farmers markets, or whatever. The answer is, because of property taxes, they can't. Likely they will have to sell this house, give up the urban life they wanted, and either move to an urban dump they can afford the property taxes on, or they move out to the country. Here is an example, via Reason, of this process of property taxes forcing out urban residents living small in favor of yuppies living the dream. It is ironic that a tax initially invented for populist reasons to cut back on wealth accumulation hurts the lower income brackets and those trying to step off of the capitalist treadmill the most. In fact, it was the poor in the Great Depression who typically lobbied for laws to put moratoriums on property tax collections.
The estate tax has many of the same origins and issues. The biggest downside of the estate tax is that it tends to force premature sales of productive business assets to pay the tax. Rather than leaving small businesses in the family, who have the experience and passion to make them work, they typically must be sold to third parties outside the family to pay the estate taxes. Again, the law of unintended consequences crops up - estate taxes and the sales they force have done more to contribute to merger and acquisition activity, which in turn drives consolidation of economic assets into fewer and fewer corporations. The tax meant to stifle wealth accumulation among individuals has in fact spurred wealth accumulation among corporations. While used for many purposes today, LBO's, that bogeyman of the left, were invented to manage this estate tax forced sale problem.
