Pursuit of Truthiness

The “death tax” or estate tax is being debated in the U.S. Congress.  Most popular discussion revolves around how “fair” it is.  In typical economist fashion, I will ignore this question to talk about its efficiency and distortion.

The government has to raise money somehow.  The ideal taxes either distort the economy in a good way (Pigovian taxes) or distort it as little as possible (lump-sum tax, height tax).  Most actual taxes distort the economy in a bad way.  Payroll and income taxes discourage work, sales taxes discourage consumption, capital gains taxes discourage investment.  So what about the estate tax?

The estate tax gives a minor reason not to earn income, and a major reason to consume rather than save.  Like direct taxes on saving and investment, the estate tax encourages people to expend resources in the present rather than saving them for the future.  Lowering these taxes would lower the discount rate.

It is odd that I have never heard (non-economist) environmentalists who claim to value “sustainability” advocating lowering any of these taxes.  It is one sure way to make many people value the future more relative to the present.  Perhaps the fact that it would largely help rich people is so repugnant that it should be avoided even if it benefits the environment and the future.

One thing I think everyone can agree on, though, is that this is one tax that should change little from year to year- lest it distort the economy in a murderous way.