However, it is true that being able to pass on wealth to one's children can be an incentive to produce more, so that on the other hand points to the benefit of a lower estate tax.
So, I think the best compromise is somewhere between the pro-meritocracy 100% tax and the pro-short-term-productivity 0% tax; that way there is still a significant incentive to earn for one's offspring, but if 1/x of the money is taxed away in each generation (and the important thing is not where it goes, but that it is taken out of the hands of the rich family), there is an exponential-decay curve for the wealth and power of the family. However, it's important that the tax is high enough to counteract the interest gains that even uninspired investing can bring. I won't venture to propose a sweet spot, but I think that approach should provide the most balance and social benefit overall.
However, I do agree with you that it might be a robust guard against the inherited wealth class gaming the system. I would prefer to intervene when such injustice is committed, but admit that that is not always easy to do. The argument you use for curtailing that risk is similar to the argument I would make in favor of term-limits.
If a trustee loses everything then the next year, they have access to another annuity distribution.
This is actually an interesting experiment. I'll run a crude test this weekend bootstrapping against the S&P500 to see how likely it is for wealth to propagate X generations into the future and report on Monday.
as diversity approaches 100%, performance approaches market returns.
The question is, how long can extreme wealth remain extreme wealth? Considering the wealth gap is increasing, I would suggest forever unless there is a "market correction" like socialism or something.
There might not be decay at all if you account for the exponential growth of investments.
The advantage of a large (40+%) estate tax is to avoid creating an old money aristocracy. There is a long history of the problems created when people who never earned it get great wealth. Granted some people build upon inherited wealth, but it's far less common than you might think and looking at the net worth of people who inherited 100+ million you find few examples of people that did much better than investing in mutual funds.
Bill Gates might be considered a great CEO but he also inherited money and exploited family connections to sell an OS he never developed to IBM. None of which would have been impacted by estate taxes.
PS: Consider the Walton family the five of them all have about 15.3 - 15.7 billion because none of them are using it to actively generate more wealth. Even though they inherited it 15+ years ago it's just stagnating.
I also bet a majority of their wealth is still in that stock, as major sell-offs of insider holdings suggests a company may not continue to produce growing profits - which hasn't been the case. However, I'm sure some still have quite a bit with extremely capable money managers.
I would not call that wealth stagnating in the least bit.
I expect they are all playing around with side investments of one sort or another, but they have had plenty of dividends to work with and little to show for it. It's not that I think the government would do all that much better, rather taxing society more to help maintain such wealth has zero benefit from what I can see.
Furthermore, I have never found Buffet's malinvestment in lucky scions argument convincing. Yes, they were born lucky, but you shouldn't handicap them for that reason. Morover, clearly some very wealthy people do chose to give most of their money away as opposed to giving it all to their heirs. Buffet and Gates have both pledged to do so with most of their money.
Merging the two ideas: if the government is collecting assets to prevent malinvestment in unworthy heirs after the proven patriarch dies, why shouldn't the government chose to confiscate the wealth of those who they deem to be making bad investments while they are alive?