Estate Tax and Meritocracy

From a research paper on international management practices and their effect on firm success:

One interesting group are the family firms, defined in our research as firms owned by the descendants of the founder… Those that are family owned and family managed (“Family, Family CEO”) have a large tail of badly managed firms, while the family owned but externally managed (“Family, External CEO”) look very similar to dispersed shareholders [are managed better]. The reason appears to be that… the eldest son becomes chief executive officer, regardless of talent considerations. Many governments around the world also provide strong tax subsidies for family firms; for example, the United Kingdom has many more family-run and -owned firms than the United States and Germany, which is likely to be related to the estate tax exemption for inherited business assets in the United Kingdom. [Emphasis added]

Via “Why Do Management Practices Differ Across Firms and Countries?”

I am a supporter of the estate tax from a meritocracy standpoint (it acts as a partial reset — you can’t have generations of a family sit back and enjoy the success of one generation). Bill Gates and Warren Buffet are also outspoken fans of estate taxes for the same reason; they have willed the bulk of their wealth to charity. This paper suggests beyond the meritocracy benefits, the estate tax actually makes business better/stronger, by encouraging the rise of talented management, whether from inside or outside of the firm.

The paper is full of examples and insights like above, showing how government policy shapes the economic efficiency of corporations. The next most interesting section compared the rigidity of labor laws in a country to the effectiveness of its managers. It’s well worth a skim at the least.