The estate tax

by Sam Selikoff January 2, 2010

As it is now 2010, the Estate Tax, which taxes the largest 2% of all estates in the country, is in abeyance. Unfortunately, the repeal of the Estate Tax will expire in 2011, as will the rest of the Bush tax cuts.

Greg Mankiw offers his opinion on why the Estate Tax should be permanently repealed here. He argues that proponents of the tax ignore basic economics by assuming the tax falls entirely on the rich and has no indirect consequences throughout the rest of the economy.

He also debunks the myth that this tax is somehow “fair” because it taxes the rich and not the poor; it does nothing of the sort:

Let me explain. Consider the story of twin brothers – Spendthrift Sam and Frugal Frank. Each starts a dot-com after college and sells the business a few years later, accumulating a $10 million nest egg. Sam then lives the high life, enjoying expensive vacations and throwing lavish parties. Frank, meanwhile, lives more modestly. He keeps his fortune invested in the economy, where it finances capital accumulation, new technologies, and economic growth. He wants to leave most of his money to his children, grandchildren, nephews, and nieces.

Now ask yourself: Which millionaire should pay higher taxes? It seems natural that they should face the same tax burden. They both started life with the same resources. What notion of fairness suggests that they should face different tax burdens? What principle of social justice says that Frank should be penalized for his frugality? None that I know of.

I knew there was a reason for my lavish behavior!


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