Commentary

‘Death Tax’ Destroys Wealth

Congress should repeal levy that robs graves, hurts competitiveness.

The politicians in Washington impose double taxation on interest, dividends and capital gains, but the “death tax” wins the prize for being the most self-destructive part of the internal revenue code. Adding an extra layer of tax when someone dies is an unsavory combination of bad economics and immoral grave robbing.

The current policy is especially foolish since every economic theory — even Marxism — agrees that saving and investment are the keys to long-run growth and higher living standards. Simply stated, some of today’s income has to be set aside to finance tomorrow’s growth, much as a farmer has to save some of his seed for next year’s crop.

The death tax (technically called the estate and gift tax) mandates the confiscation of as much as 45% of the wealth of entrepreneurs, investors or business owners. Economists warn that the death tax reduces the capital stock. That sounds like jargon, but it means all of us have lower living standards because of less investment, fewer machines, less technology and diminished innovation.

Ironically, other nations have figured out that the death tax does a lot of damage in a competitive global economy. Many people will not be surprised to know that a free-market paradise such as Hong Kong has eliminated its death tax, but it is certainly newsworthy that European welfare states such as Austria and Sweden also have repealed this unfair tax. Australia, Russia and New Zealand are among the other nations that have figured out how senseless it is to penalize wealth creation.

There may be a bit of good news on the horizon. Assuming Congress does not change the law, the death tax disappears in 2010. But since the death tax comes roaring back to life in 2011 (with an even higher tax rate of 55%), this creates a bit of a quandary. I’m sure the successful people affected by the death tax love their children, but how many of them are willing to jump off a bridge before the end of next year to keep the IRS from seizing the lion’s share of their wealth?

Daniel J. Mitchell is a senior fellow at the Cato Institute, a libertarian think tank in Washington D.C., and a former staffer on the Senate Finance Committee.