How the Estate Tax Could Stimulate the Economy (If Done Right)


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 are assumed to have 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 opinion is that it is a progressive tax that only a very small minority of estates pay. However, in order to quell criticism I think it would be wise to reformulate the estate tax into a “monetary dam” penalty tax.

To explain this you have to first take a step back and 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 mostly wealthy individuals that are able to take the money they get and build a “monetary dam”. They take the money out of circulation and put it into a bank account in the Cayman Islands, a bank account Switzerland, or stuff it in a mattress. 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 literally 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. Go buy that twenty million dollar yacht or invest in a tech startup; keep the money flowing. That was the original goal, if you recall. 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. We can’t stuff this into a shell corporation or a series of them, which effectively becomes another type of “bank”. The money needs to go back into circulation. Doing this, I’d imagine, would inject a significant amount of money back into the economy. How much I can’t say because when I looked the data isn’t out there, although I’d love to do the math on it and figure it out.

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