The Economics of the Estate Tax

The Economics of the Estate Tax
A Joint Economic Committee (JEC) Study, December 1998
(The JEC is one of four Joint Committees of Congress representing bipartisan representation from the Senate and the House of Representatives)

Executive Summary

The study examines the arguments for and against the federal estate tax and concludes that the tax generates costs to taxpayers, the economy and the environment that exceed its potential benefits.

This paper documents the extensive costs associated with the federal estate tax. Specifically, the report finds:

The existence of the estate tax this century has reduced the stock of capital in the economy by approximately $497 billion, or 3.2 percent.
The distortionary incentives in the estate tax result in the inefficient allocation of resources, discouraging saving and investment and lowering the after-tax return on investments.
The estate tax is extremely punitive, with marginal tax rates ranging from 37% to nearly 80% in some instances.
The estate tax is a leading cause of dissolution for thousands of family-run businesses. Estate tax planning further diverts resources available for investment and employment.
The estate tax obstructs environmental conservation. The need to pay large estate tax bills often force family to develop environmentally sensitive land.
The estate tax violates the basic principles of good tax system: it is complicated, unfair and inefficient.

In addition, a review of the arguments in favor of the estate tax suggests that the tax produces no benefits that would justify the large social and economic costs.

The estate tax is a "virtue tax" in the sense that penalizes work, savings and thrift in favor of large-scale consumption.
Empirical and theoretical research indicates that the estate tax is ineffective at reducing inequality, and may actually increase inequality of consumption.
The enormous compliance costs associated with the estate tax are the same general magnitude as the tax’s revenue yield, or about $23 billion in 1998.
The deduction for charitable bequests stimulates little or no additional giving.
The estate tax raises very little, if any, net revenue for the federal government. The distortionary effects of the estate tax results in losses under the income tax that are roughly the same size as estate tax revenue.

The Case for Burying the Estate Tax,
Institute for Policy Innovation, March 1999
Authors: Gary Robbins, Senior Research Fellow, and Aldona Robbins, Senior Research Fellow

Executive Summary:
Perhaps no section of the tax code does as much societal damage while generating relatively little revenue as the estate tax.
Estate taxes generate less than one percent of federal revenues.
Estate tax compliance costs the economy almost as much as the revenue raised; such compliance costs are a deadweight loss to society.

High marginal estate tax rates (from 37% to 55%) often force heirs to sell family farms or businesses just to pay the estate tax bill.
Estate taxes strike families when they are at their most vulnerable: along with the family member, families can lose what the family member built.
High marginal estate tax rates also discourage savings and investment, reducing economic growth.

Further, there is neither social nor economic justification for the estate tax.

Estate taxes today are far out of line with historical precedent. Throughout most of U.S. history, estate taxes were temporary measures during wartime, and were eliminated when hostilities ceased.
The largest estates do not even pay the highest tax rates. Typically, owners of small businesses and family farms who amass wealth through a lifetime of hard work and thrift pay significantly higher marginal estate tax rates than the very rich, particularly those who inherited their wealth.

Today, estate taxes reach much more deeply into the middle class than ever before.

Today, estates over $650,000 are taxed, compared to $9 million (in today’s asset dollars) in 1916.
Although tax schedules give the impression that the estate tax begins at 18 percent, in fact, most people begin paying at a marginal rate of 37 percent on the first dollar of taxable estates.

Eliminating the estate tax altogether would eliminate all these complexities and injustices with no revenue loss to the Treasury. In fact, after ten years, eliminating the estate tax would produce sizeable economic gains, actually increasing federal revenues above the current baseline, according to the analysis in this study.

In the 105th Congress, more that 50 bills dealing with estate taxes were introduced. Proposals ranged from relief directed to specific groups of taxpayers, such as farmers and closely held businesses, to the outright elimination of estate and gift taxes. More proposals have already been introduced during the 106th Congress.

In order to reduce compliance costs, social injustice, and hindrances to economic growth, Congress should make estate tax policy a priority for action. Serious reduction or outright elimination of estate taxes would be one of the best legacies that the 106th Congress could leave future generations.