Why the Estate Tax Could be a Good Thing (If Done Right)

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The estate tax in the US taxes an individual’s estate upon their death with the amount varying by estate value and the skill of the estate planner among other things.  Many critics consider this double taxation and I would agree.  The individuals worked hard for their money and property and were taxed then so why should they be taxed on it again when they transfer their assets to someone else?

This is an absolutely valid argument and the only counter argument that has any teeth in my oponion is that it is a progressive tax that only a very small minority of estates pay. However, in order to quell criticism it would be wise to reformulate the estate tax into a dam penalty tax.

To explain this you have to realize how the economy works.  People say “money flows” for a reason.  It circulates throughout the economy just like blood circulates throughout your body.  Actually at a rate of about 18.6 trillion dollars a year as of this writing.  This means that when someone gets money from any source, to keep the economy moving they need to pass it on as quickly as possible.

The poor do this so well they spend money they don’t even have.  The middle class does it quite well also but most of the time keep their heads just barely above the water.  This is true of many upper income households as well.  However there is a certain percentage of wealthy individuals that are able to take the money they get and build a dam.  This money, as long as it isn’t loaned out,  is unavailable for continued use in the economy.  This is truly a drag on the economy as that money is taken out of circulation. This is where a dam penalty tax could be useful.  A penalty for damming the money instead of spending it and keeping it in circulation would discourage this behavior.

If it’s spent on something though, don’t tax it because it got put back into circulation. That was the original goal, remember. Of course there would have to be rules in place to ensure the spent object was real and the money wasn’t just being diverted to another dam with  a slightly different name. It needs to go back into circulation. Doing this, I’d imagine, would inject a lot of money back into the economy.  How much I can’t say because the data isn’t out there although I’d love to do the math on it.

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