Sunday, November 26, 2006

Death Tax

Keith and I did another Sunday debate, this time on the estate tax. You'll find my piece here and Keith's here.

And here is my piece for posterity:

Estate tax fails to meet standards of a ‘good tax’
As I write this, I’m looking at a Web cam image of my parents on a cruise ship in the Mediterranean. They are busy spending my inheritance on expensive trips like this one. My father, an accountant by training, tells me he is just trying to avoid the estate tax. A tax which I oppose on principle, even though my dad is making sure it will never affect me.

Afew confessions to make: In 2006 you won’t need to file an estate return unless your gross estate exceeds $2 million. Even then, you may not pay a tax if you qualify for certain deductions. Estimates are that only the wealthiest 2 percent of Americans will be subject to the estate tax, but that doesn’t mean the other 98 percent of Americans shouldn’t care.

Because, as economists are often wont to say, who pays the tax (as in from whom the tax is collected), is not necessarily the same as the person who pays (as in who is affected by) the tax. Not only are the heirs affected, but so is everyone else in our economy, through slower economic growth.

I am not arguing that we should not pay taxes. Rather I’m arguing that this particular tax does not meet the standards of a good tax. I know “good tax” sounds like an oxymoron, but a good tax is simple, easily understood, seldom changes, is neutral to different choices and promotes economic growth.The estate tax fails at least the last two principles since it treats saving and wealth accumulation differently depending on how much you have saved. It does not treat the savings over $2 million as it does the first $2 million. And in so doing it discourages economic growth by discouraging capital accumulation.

Let’s say I had another set of parents, a more austere couple, they eschew the globetrotting for a life of ramen noodles and coupon clipping so that they can provide me and my future family with a financial safety net. Why should the government impose a tax on them that they will not impose on my actual parents?Why would a fair tax system penalize someone for self-sacrificing behavior intended to make their children and grandchildren better off? Why are we penalizing those who live frugally and through their frugal behavior are laying the seeds of economic growth for the rest of us to enjoy? Not only should we not discourage that behavior, we should probably do more to encourage it.

As anybody who has noticed the rising amount of U.S. debt held by foreigners should realize, it is not occurring because typical Ameri-cans save too much, but because they are saving too little. So let’s not penalize people for saving more.

If it’s the deficit that worries you, find somewhere else to raise revenue or, better yet, cut spending. I offer the expenditures in Iraq as a starting place because I know Keith would agree with me on that one.

Keith argues that private wealth accumulation is due to our public institutions and markets and therefore should be taxed more heavily. Keith is confused. I’d like to point out that our system of progressive taxation will not be affected by eliminating the death tax, in fact it will be improved as there will be more incentive to accumulate wealth for your children rather than pass your current income on to them now when they are likely to be in a much lower tax bracket.

It’s not clear that the tax is very effective at raising revenue either. Wealthy Americans can afford to hire accountants, lawyers, and estate planners to figure out ways to avoid paying the estate tax. Even though this might be one of the nicer things lawyers do for people, it isn’t a very productive use of society’s resources. So, Keith, please join me in setting those lawyers free — and encouraging economic growth for all — by ending the estate tax.

Taggert J. Brooks teaches economics at the University of Wisconsin-La Crosse.

1 comment:

Taggert said...