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Argument: Estate tax reduces personal savings and economic health

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According to the Brookings Institute 11/17/00, William G. Gale Maria G. Perozek contend that there was "a general presumption that higher estate taxes will reduce saving and aggregate capital accumulation. If correct, this presumption implies that estate taxation reduces the long-run growth prospects for the economy. Reductions in saving could also affect the distribution of income by reducing the capital-labor ratio, thereby raising the return to capital and reducing wages. (Kotlikoff and Summers 1981, McCaffery 1994, Stiglitz 1978.) There are a number of reasons to suspect that estate taxes have an important effect on saving. Most importantly, the estate tax places a one-time levy on wealth that is not bequeathed to a spouse or given to charity. There is at least a prima facie case that a wealth tax reduces saving. Because it is a tax on capital value and because of interactions with other taxes, the estate tax can impose very high effective tax rates on capital income (Shoven and Wise 1996, Poterba 2000, Gale 2000). In addition, bequests and inter vivos transfers plausibly account for half or more of all wealth accumulation in the United States and other countries (Gale and Scholz 1994, Kotlikoff and Summers 1981, Masson and Pestieau 1997, Modigliani 1988). Finally, although the estate tax only directly affects the very wealthiest households, large inter vivos transfers, bequests, and wealth are also concentrated among wealthy households (Aaron and Munnell 1992, Carroll 2000, Gale and Scholz 1994, Menchik and David 1983)."

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