Monday, June 05, 2006

Fairness & Taxation

A lot of people like to think of estate taxes as one of the many ways we "level the playing field" between the rich and the poor. The main argument for retaining estate taxes, then, is not one of efficiency but equity. Gregory Mankiw (yes, that Mankiw) makes an excellent argument that repealing the estate tax is actually the fairer policy. He quotes a previous column of his:

Consider the story of twin brothers – Spendthrift Sam and Frugal Frank. Each starts a dot-com after college and sells the business a few years later, accumulating a $10 million nest egg. Sam then lives the high life, enjoying expensive vacations and throwing lavish parties. Frank, meanwhile, lives more modestly. He keeps his fortune invested in the economy, where it finances capital accumulation, new technologies, and economic growth. He wants to leave most of his money to his children, grandchildren, nephews, and nieces.Now ask yourself: Which millionaire should pay higher taxes?... What principle of social justice says that Frank should be penalized for his frugality? None that I know of.

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