Monday, June 05, 2006

The Estate Tax Debate

The issue of estate tax repeal is heating up. In today's Washington Post, columnist Sebastian Mallaby writes,
It doesn't matter if you are liberal or conservative, Democrat or Republican.There is no possible excuse for doing what Congress is poised to do this week: Abolish the estate tax.
Mallaby suggests there is only one reasonable side in this debate. Brad DeLong makes a similar suggestion at this blog. In today's NY Times, Paul Krugman says the estate tax is "a moral issue."

In fact, the estate tax is controversial among economists. Economists Ed Prescott, Martin Feldstein, Gary Becker, and Jeff Miron are all on record favoring repeal. There is a vast literature in economics arguing against capital taxation in favor of consumption taxation. Anyone who takes that literature seriously would likely favor estate tax repeal, because the estate tax is just a particular form of capital taxation.

In the past, I have made the case for estate tax repeal on the grounds of (believe it or not) fairness. Here is the argument:

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?... What principle of social justice says that Frank should be penalized for his frugality? None that I know of.
Some young economists who favor estate taxation have been pursuing interesting new approaches to the topic. (I wouldn't use the word "interesting" to describe Krugman's suggestion that those who disagree with him are immoral.) Lately, I have been studying this work by the young econ stars Emmanuel Farhi and Ivan Werning. Maybe when I fully process it, it will change my mind. So far, it hasn't.