Estate Tax Incentivizes Wasteful Spending

Opponents of the estate tax argue that it provides an incentive for people to spend everything they earn and die broke. Ed McCaffrey, a Professor of Law at USC School of Law, wrote an article for the Wall Street Journal that demonstrated this concept with an analogy:

If the law allows people to keep what they earn, everyone has a private incentive to work hard—which ends up benefiting everyone else. Consider Smith’s butcher, baker and brewer. A system that lets them keep what they earn encourages them to produce more—and hence less expensive—meat, bread and brew. They can also put more money in the bank, another positive for their neighbors and the nation. Having large supplies of private capital available for lending keeps interest rates low. That helps all borrowers and, all things being equal, drives up wages, because employers don’t have to spend as much on financing capital investments.

The estate tax encourages the wealthy baker to stop working and go broke. That hurts the brewer, who has to pay more for the bread he eats and the money he borrows. Even if the baker doesn’t blow all of his money, he will likely try to shelter as much as possible with estate planning—which means he’s spending time engaging in needless, complex transactions instead of doing his best job and hiding his money instead of letting it benefit other borrowers.

McCaffrey suggests that we get rid of the income, gift, and estate taxes and replace them with a progressive spending tax. This system of taxation would provide incentives to save and die rich rather than waste money and die broke.

See Ed McCaffrey, It’s Unfair, and There’s a Better Way, W.S.J., Sept. 20, 2010.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.