The estate tax (also known as the death tax) is possibly the most devastating form of taxation ever created. It is for this reason that Congress passed a tax relief package in 2001 gradually phasing it out. The relief reached its peak this year resulting in a zero percent estate tax rate, something which hasn’t been achieved since 1916. Unfortunately, the tax relief was not made permanent and is headed for expiration in 2011 with a return to a 55 percent rate. The revival of the death tax is both disastrous for an already weakened economy and just plain wrong for several reasons.
The most direct negative impact of the death tax is that it discourages savings. Rather than putting money in the bank or investing it, people are encouraged to squander their earnings. Milton Freidman put it this way, “Because of the death tax, there’s little need to save, you might as well spend your money on wine, women and song as to save it.” What the death tax does essentially is create perverse incentives. It punishes those who act responsibly, saving what they earn and investing in future generations while rewarding those who spend quickly for short-term gains.
The estate tax is a form of double taxation. Assets are already subjected to federal payroll, income and capital gains taxes throughout a lifetime, and upon death, they are taxed once more. This reduces the total capital stock, which translates to lower living standards from the loss of investment and innovation.
Some believe that in this current debt crisis, the federal government needs the estate tax in order to take in more revenue to balance the budget. Strangely enough, an economist formerly with the Clinton administration Alicia Munnell found that the cost of implementing the death tax is almost the same as the actual revenue it brings in! Therefore, the advocates behind the estate tax may be more ideologically driven than anything. Many view taxes not as a necessary evil to fund government services, but as a means to shape society into what they prefer. It’s not enough that the government bills are paid for, but that the rich must be punished for their success. The envious nature of those on the left is revealed in that they cannot stand that some may be better off than themselves. If the death tax results in so little revenue, what motivation could there be behind it other than sheer greed?
Not only is the tax economically stupid, but it is also immoral. Americans who work hard their entire lives should be allowed to pass on their earnings to their children without the government getting in the way. The idea of some bureaucrat being in charge of distributing the lifelong accumulated wealth of an individual is terrible to contemplate.
Consequently, many economically competitive countries have seen the light on this issue and repealed their respective estate taxes in recent years, countries such as China, Canada, and Israel. Even Sweden, a welfare state so often lauded by advocates on the left did away with their death tax in order to stimulate economic growth.
The death tax produces little revenue, creates incentives to spend rather than save, hurts investment, and is a form of wealth redistribution. If President Obama and Congress want to encourage economic recovery, killing off the death tax is a great place to start.