In a piece yesterday from the Tax Policy Center, Ben Harris argues against some theoretical anti-estate tax analysis done by Doug Holtz-Eakin, former CBO director and McCain campaign economist. While Holtz-Eakin's theory seems plausible, Harris calls it just that -- theory. I think Harris is on the right track. But I think considering the estate tax from a different theoretical point of view might turn out to support Harris even more strongly.
Holtz-Eakin says this incentive is particularly important for small business owners. If you rid get of the estate tax, they have a greater incentive to work hard, because they can leave the company to their children. Harris' statistics show this to be somewhat irrelevant:
Most small businesses are worth far less than the exemption level (currently set at $7 million per couple and higher for many small business owners who value their firms at below market price). We estimate that only 100 small businesses and family farms would pay any tax in 2009, assuming current law is extended.
I would say that there are also easy ways to fix this problem. For example, make sole proprietorships exempt from the estate tax. That's probably what most of those small businesses are anyway.
But I think the Estate Tax gets more interesting when you talk about morality. That's what makes it a fun and controversial topic. One anonymous commenter to Harris' piece explains one common view:
Neither increasing or (sic) decreasing economic growth will ever justify, in my mind, the Govt robbing dead people.
Right. But trying to ensure that Paris Hilton can always be a useless human being that lives to have the paparazzi snap pictures of her downing martinis seems to damage the moral righteousness of estate tax opponents.
Instead, I'd argue that the estate tax might be the most moral of taxes. When I'm dead, I probably care much less about my money than I did when I was alive. I hear heaven does not accept U.S. currency. So if I had the option of being taxed when I'm dead, or when I was alive, I'd choose the former option.
But what about my children? Surely I'd want to leave them all that money I made when I was alive, right? I mean, sure. I would probably want to leave my children a nice little going away gift. But I think responsible parents would be more concerned that they raised their children well and brought them up to be successful, hard working people on their own. If they need to rely on my money, then that's a problem.
I think this argument also matters from an economic standpoint. If the Paris Hiltons of the world were actually productive human beings, I think our economy would be better off. Therein lies the incentive a death tax creates -- to make sure to raise children that will be productive when you're gone.
So I say increase the estate tax substantially for all people and lower income taxes. Sure, it may inspire people to die with less in savings, but I suspect that effect will be pretty negligible since our nation's savings rate can't get a whole lot lower anyway. And besides -- just think of all the great consumption spending baby boomers would feel compelled to partake in before their time is up. Talk about economic growth!
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