NCPA - National Center for Policy Analysis

Estate Tax Encourages Wealthy To Consume More

August 29, 2000

If you have it, spend it before you die, otherwise the government is going to get it. Wealthy individuals who are inclined to be frugal and invest in profitable businesses are simply fools whose heirs will suffer. Those seem to be the messages implicit in the estate tax, analysts conclude.

That is because the estate tax punishes people for their virtues, according to National Bureau of Economic Research economists Steven Venti and David Wise. In a recent study, they found:

  • Whether a person reaches old age wealthy or penniless mostly depends on the percentage of his earnings he saved.
  • Much less a factor is the total amount of money he made in his lifetime.
  • This means that most of the burden of the estate tax falls not on those who have been lucky throughout their lives -- but rather on those who have been frugal.

Other tax policies also discourage savings. For example, among persons with the same lifetime earnings, savers with significant accumulated assets pay higher Social Security taxes than do those who have saved little and consumed more when younger.

Source: Steven Venti and David Wise, "Choice, Chance, and Wealth Dispersion at Retirement," NBER Working Paper No. 7521, February 2000, National Bureau Of Economic Research, 1050 Massachusetts Avenue, Cambridge, Mass. 02138, (617) 868-3900; N. Gregory Mankiw (Harvard University), "The Estate Tax Is One Death Penalty Too Many," Fortune, September 4, 2000.

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