Wednesday, May 27, 2009

Estate taxation is good, end the debate

For some reason I cannot understand, the US Republicans keep pushing for the repeal of estate taxation, because for some reason it would be unfair to tax very rich, dead people. Well, that is not the real reason: it would reduce the incentive to entrepreneurship, assuming entrepreneurs would want to give large inheritances to their descendants. So the obvious question is to ask what impact estate taxation has on entrepreneurship.

Marco Cagetti and Mariacristina De Nardi answer that estate taxation has no measurable impact on investment and savings for small businesses (the ones always mentioned in the Republican rhetoric), but it does indeed distort decisions for large businesses. Lower output ensues, but this is not what matters. Removing estate taxation would improve the welfare of the very rich, and hurt everyone else. We have heard these arguments before, but now we have a rich model and numbers to prove it.

The key point here is that the alternatives to estate taxation are worse for welfare. total income taxation discourages everyone to work or save, consumption taxation reduces the welfare of everyone. Finally, even reducing government expenses hurts some, as the lower interest rate and the somewhat rich people who would not have been taxed get lower incomes from capital. Note that the model can deliver the optimal estate taxation scheme: a tax rate of 16% and a deductive of US$5,000,000. My dead self is safe.

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