Sunday, November 7, 2010

Greg Mankiw On The Estate Tax

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.


We already know that capital gains taxes tend to reduce capital gains (and, ipso facto, capital gains tax revenues). It only stands to reason that inheritance taxes are significantly reducing the size of the inheritances subject to tax. Monsieur Obama wouldn't care, of course -- it's all a matter of fairness, he'd say.

The rest of us should know better.

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