The Estate Tax Debate

The estate tax debate is back, with the Senate ready to consider a repeal again, and I find myself agreeing with both Greg Mankiw and Paul Krugman, despite their opposing views.

Here's Krugman's bottom line:

In the interest of stiffening those spines, let me remind senators that this isn't just a fiscal issue, it's also a moral issue. Congress has already declared that the budget deficit is serious enough to warrant depriving children of health care; how can it now say that it's worth enlarging the deficit to give Paris Hilton a tax break?

Here's Mankiw's:

In the past, I have made the case for estate tax repeal on the grounds of (believe it or not) fairness. Here is the argument:

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.

What's missing here is that they are not talking the same language. Mankiw is discussing an estate tax in the abstract, absent any budget considerations. Krugman is addressing the repeal of the estate tax in light of rising deficits.

I find myself agreeing with both of them. An estate tax punishes those who save and invest; I don't like that. In a vacuum, I'd rather have consumption taxes. However, it's not that way. We cut benefits to the poor and elderly in order to "defeat" the deficit, but also want to repeal a highly progressive tax? That's not ok. I'll take a repeal of the estate tax if we counter it with a tax increase that also falls on the rich. Otherwise, we're just continuing to "starve the beast."