The damage to families, though, is just the tip of the iceberg. The real problem, at least to economists, is that the death tax discourages economic growth by reducing saving and investment.
For all intents and purposes, the tax code sends a perverse message to America’s entrepreneurs, investors, small‐business owners and farmers: If you squander your money as quickly as possible, the government will not tax you. But if you behave responsibly and invest in the nation’s future, the government will swoop in like a flock of vultures and grab a huge chunk of your money when you die.
This matters because every economic theory — even Marxism — agrees that capital formation is the key to growth. Higher living standards are possible only if people invest by setting aside some of today’s income. But a punitive death tax, especially when combined with other forms of double taxation on capital gains and dividends, reduces the incentive to save and invest.
Scholars who have examined this issue estimate that the death tax has reduced America’s stock of saving and investment by nearly $850 billion.
Moreover, the death tax is a job killer, reducing employment by 1.5 million.
Ideally, the death tax should be abolished. Nations as diverse as Russia, Australia and Sweden have killed this unfair levy. But if the death tax cannot be killed, it should be reduced to the lowest possible rate. Sens. Jon Kyl, R‐Ariz., and Blanche Lincoln, D‐Ark., have proposed a 35% rate.
While this would be just a small step in the right direction, it certainly would be better than the spiteful 45% rate proposed by the Obama administration.