Senate Majority Leader Bill Frist recently announced that he would do everything in his power to “bury the ‘death tax’ once and for all.” But since Frist lacks the 60 votes needed to block a Democratic filibuster on the issue, a compromise is expected — one that would move the top rate down into the 15 percent range alongside a $3.5 million exclusion. While the discussed compromise would be a huge improvement on the existing estate levy, it also to some degree misses the point.
The estate tax shouldn’t be abolished as a favor to the super-rich, but instead as a favor to the U.S. economy. It should be repealed on estates of all sizes because the economic impact will be greatest if the largest estates are fully exempted.
Any deal that retains the tax on the largest estates is one that insures that human and financial capital will continue to be wasted on avoidance. Contrary to the assumption that repeal would insure conspicuous consumption of houses, jewelry, and cars, the reverse is more likely true.
Indeed, the easiest way to induce consumption would be to increase the amount that estates could be legally taxed, all the while closing as many loopholes as possible. The rich, correctly sensing the difficulty inherent in passing their fortunes on, would spend their money now rather than having it pass to the federal government, which could truly waste it. Conversely, if total repeal occurred, the disincentives to save, invest, and work with future generations in mind would be removed. Money saved rather than consumed would serve as a form of capital for tomorrow’s entrepreneurs.
Regarding the argument that says total repeal would calcify a permanent aristocracy, the truth is that abolishment would be the very best insurance policy against a permanent elite. Billionaires including Google’s Larry Paige and Sergey Brin, along with Jeff Bezos and Michael Dell, are where they are today because capital was made available to them. The success of each shows that new fortunes will continue to eclipse those of the past so long as capital markets are vibrant.
Estate taxes, be they 15 percent or 55 percent, create near-term incentives to spend money on avoidance, and to consume rather than save capital. On the other hand, total repeal on the largest estates would create the greatest incentive for today’s rich and their descendants to offer up as much of their fortunes as possible to others in the form of capital. The idle rich would by definition become even wealthier, but they would only do so if their money were funding future wealth-creating innovation.
While any marginal rate cut is a good one, it should be hoped that the debate is centered on what is best for the economy overall. Ideally politicians of both parties will ignore short-term class arguments, and instead argue for total repeal with long-term economic growth in mind.
–John Tamny is a writer in Washington, D.C. He can be contacted at email@example.com.