I don't know the history of the economics of inheritance taxes, but consider what the life-cycle hypothesis (LCH) says about it. First, a proportional tax on inheritance (say 50%) is imposed (where none existed) and people want to leave a fixed amount of "bequests" to their scions, that would encourage people to double their saving. Lowering the estate tax rate would reduce the incentive to save! (Keynesians might favor this policy, because it would stimulate effective demand.) Second, those who inherit wealth would have little incentive to save. In fact, if inherited wealth > desired bequests, that might completely cancel out the life-cycle saving from labor income. (If inherited wealth = desired bequests, all saving is from labor income, for retirement.) I think that one of the things that prep schools and places like Yale and Harvard to is to teach rich people not to dip into capital, so that desired bequests do not exceed inherited wealth. Of course, sometimes they fail. The textbook presentation of the LCH leaves out the interest and dividends that accumulate from the inherited wealth. Bringing them in, one might decide to preserve the inherited wealth for future generations while consuming the interest and dividends. The existence of those interest and dividends in my retirement years would undermine my incentive to save from labor income (just as the presence of the social security pension plan allegedly does). Fourth, getting a bit beyond the LCH, which takes labor income as given, inherited wealth undermines the incentive to work. (For some unknown reason, the Labor Economics books never point this out, whereas the disincentive effect of "welfare" payments is stressed.) If I were to inherit a billion dollars, why couldn't I and my wife just spend it over the next 30 years (which is what I assume remains of our lives) at a rate of $33 million per year (ignoring interest and dividend income)? Or we could spend $20 million per year, leaving quite a tidy sum for the children! Why work at all? (Of course, the rich get their pick of the jobs...) By using birth control, we could make sure that this sum isn't distributed over a large number of kids, so each would get a lot. Of course, if we have fewer children, that might undermine our incentive to leave a large bequest (especially if we worry that their work incentive might be undermined by a legacy), so spend, spend, spend! in pen-l solidarity, Jim Devine [EMAIL PROTECTED] [EMAIL PROTECTED] Econ. Dept., Loyola Marymount Univ. 7900 Loyola Blvd., Los Angeles, CA 90045-8410 USA 310/338-2948 (daytime, during workweek); FAX: 310/338-1950 "It takes a busload of faith to get by." -- Lou Reed.
