Dick Thaler, writing in the New York Times, says so many wrong things about the estate tax that I don’t know where to begin. But let’s begin here:
First, it is incorrect to say the estate tax amounts to double taxation. The wealth in many large estates has never been taxed because it is largely in the form of unrealized — therefore untaxed — capital gains.
This is just not true. Virtually all of the wealth in every large estate has already been taxed at least once. Namely, it was taxed when it was earned. You do not understand this issue unless you understand the following simple example: Scrooge McDuck earns a dollar, makes some fortunate investments, and leaves a hundred million dollars in unrealized capital gains to his ne’er-do-well nephews. If Scrooge has to pay 50 cents income tax on that dollar, then he invests half as much, earns half as much, and leaves his nephews half as much. Scrooge’s fifty cent tax bill has already cost his nephews fifty million dollars.
In fact, there’s a good chance Scrooge (or his ancestors) earned a lot of that money back in the bad old pre-Kennedy days when marginal tax rates hovered around 93%. If so, 93% of the estate is already lost to taxes. That’s pretty far from nothing.
A more accurate statement might be this:
First, it is incorrect to say the estate tax amounts to triple taxation. The wealth in many large estates has been taxed only once because it is largely in the form of unrealized capital gains. Therefore the estate tax amounts to double taxation, not triple.
Of course, when you say it the more accurate way, it stops looking like an argument for estate taxation.
(Edited to Add: I am unsurprised to learn that Don Boudreaux beat me to the punch on this. I am, however, surprised to learn from Don’s post that the point about double taxation — a point I’ve been harping on lately — was made by John Stuart Mill. I am, however, unsurprised to be reminded that Don Boudreaux is better educated than I.)
Then there’s this:
There are lots of ways to spend $250 billion. Trim the deficit, improve education, support the troops, or make sure heiresses like Paris Hilton have the proper attire for trips to St.-Tropez. At this time in our history, which of them seem prudent?
What seems prudent is to discourage Paris Hilton from buying a $100 million diamond-studded gown, so that she’ll leave her money in the bank where it can fund mortgages, business expansions, and, yes, government projects. One way to do that is to remind her that she’s spending her future kids’ inheritance. (Actually, I expect that even Paris Hilton can figure this out on her own.) Except that doesn’t work so well when the inheritance is taxed. So by all means, let’s be prudent and not tax it.