Thursday, April 14, 2005

Maybe we'll let Granny see 2011 after all

Good morning, FOCEs. The Cranky Economist is in Cranky New York today, so I will not be posting during the day. Instead I give you a veritable feast of items that I prepared last night. Or two. Let it not be said that I'm a stingy opinionist.

We turn first to the estate tax, which the House voted yesterday to repeal permanently. A hot-button political issue in recent years, the estate tax was repealed temporarily in 2001, with the intent that it would re-appear in 2011. Which created a perverse incentive for greedy heirs across the land to off their ancestors before ringing in 2011 (hence the brilliant title on this post).

So let's have us a little discussion of why Congress is finally doing the right thing here, shall we:

First, dispense with the notion that a temporary tax cut can accomplish anything. Time was when I would have said that it was a foolish idea because people would just adjust their behavior to account for their expectation of higher taxes in the future. However, there is now mixed evidence on this. As a friend of mine in high school used to say, "Never underestimate the stupidity of the masses." Mine isn't an empirical objection but a theoretical one. To accept the "stimulus when it's needed" argument requires a couple of assumptions. First, you have to believe that the government can move deftly enough to engineer the economy. Horse hockey.

But the second is the funniest. Democrats who trumpet this line are implicitly accepting the claim that tax cuts are stimulative. Let's follow this line to its logical conclusion. You therefore have to accept that a tax increase will slow the economy, even if you try to argue that the benefits of the government spending are an offset. But how can you argue for the offset if you have already conceded in another circumstance that the tax cut would be more effective than the spending?

But that's just academic. How about the reality of the estate tax? It's just a money grab. Remember, almost all of the assets previously subject to estate taxes had already been taxed amply before. Congress has had one bite at the apple; our elected representatives don't deserve more.

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