Whenever Republicans gain control of both Congress and the White House, there is talk of abolishing the estate tax. Groups such as Americans for Tax Reform love to call for the end of what they inaccurately label the death tax, and President Donald Trump's campaign website included a plan for replacing it with a new kind of capital-gains tax.
Elimination would be a minor change — the estate tax has already been mostly abolished. It was phased out under President George W. Bush, between 2003 and 2009. Although President Barack Obama resurrected the tax in 2010, the levy now has a very high exemption — if your estate is less than $5 million, you don't pay a dime. Because of this, almost no one actually pays estate taxes anymore — whereas about 1% to 2% of households paid the tax in the 1980s and 1990s, now less than 0.2% pay anything.
But this isn't a good thing. The much-maligned estate tax is far better than its detractors claim — and instead of being eliminated, it should be restored to its 1980s levels.
First, as economists like the University of Minnesota's Fatih Guvenen have pointed out, there's reason to think wealth taxes like the estate tax can make a nation more productive. Wealth often gets passed on to heirs who squander it on bad investments. They invest in companies or real estate with poor prospects. They speculate foolishly in the markets and lose their money. Or they park their wealth in low-earning bonds, keeping it from being invested in projects that will expand the economy.
The estate tax can save some of society's capital from this sad fate. Skillful heirs, such as the Koch brothers – who turned their father's successful company into an even more successful conglomerate — would easily be able to pay the tax and still get richer. But heirs with lesser skills would have a substantial part of their fortunes garnished before they could fritter it away. If the resulting revenue is used to offset cuts in the corporate tax, it essentially redistributes money from bad investors to profitable companies. That should give economic growth a boost.
