Policy Documents

Research & Commentary: Estate Tax

August 30, 2013

The modern estate tax, which taxed an individual’s assets upon death, was created in 1916 alongside the first income tax. As with many early forms of new taxation, the tax was designed to only hit very wealthy individuals and only at a very minor rate. Over the century, the estate tax steadily climbed in rates and expanded its scope to poorer individuals. President Bush launched an initiative to reduce and phase out the estate tax by 2009, but President Obama and his first Congress saved the tax at exemptions up to $5 million and a 35% rate (which has since been raised to 40%).

Fourteen states also have their own estate taxes, nearly all of which reach down to far lower incomes than the federal rate. Pennsylvania and Iowa have no wealth exemptions. Seven states also have inheritance taxes which only effect wealth which is inherited, while two states have estate and inheritance taxes. Unfortunately, these twenty one states maintain relatively high rates between 10% and 20%.

Proponents of the estate tax argue that the tax fights against wealth concentration in prominent families. Estate taxes act to reinforce the progressive income tax, but unlike an income tax, it has less of a negative effect on productivity. Furthermore, some Keynesian economists theorize that the estate tax can help money circulate throughout the economy. Considering the state of the US budget and GDP growth, the estate tax is an effective way of raising taxes on those who can afford it while not significantly burdening the economy. The estate tax and the gift tax produced a combined $11 billion for the federal government in 2012.

The estate tax is often referred to as the “death tax” and opponents recognize it as a form of class warfare. There is no economic or ethical basis for punishing individuals for accumulating a lot of money, or trying to pass that wealth onto their children. Not only does the estate tax not raise a significant amount of revenue but it adds a great deal of complexity into the legal code.

The estate tax is economically destructive and inefficient form of double taxation. The tax drains capital out of the market and provides very modest revenue and is used as a way to force economic redistribution. Ultimately, the tax diminishes capital accumulation, and therefore its effects trickle down to the middle class and poor while serving only to benefit class warfare politicians and estate lawyers.

The following documents examine estate taxes, their effects on the economy and investment, and current proposals for reform, from multiple perspectives.

 

Ten Principles of State Fiscal Policy
http://heartland.org/sites/all/modules/custom/heartland_migration/files/pdfs/19354.pdf
Heartland’s President, Joseph Bast, and senior analyst, Richard Vedder list the principles by which states should conduct their tax and expenditure policies. Especially relevant to the estate tax are the first two principles: keep taxes low, and don’t penalize earnings and investment. The estate tax is designed to extract wealth from families with a high level of accumulated savings. These savings are invariably located in banks and investments which provide capital to the economy. Therefore, the estate tax directly violates this principle and hinders economic production and prosperity.

Research and Commentary: Estate Taxes
http://heartland.org/policy-documents/research-commentary-estate-taxes
Heartland’s Matthew Glans created a research and commentary last year when the estate tax was expected to dramatically rise. Although the actual increase was much smaller, Glans’s arguments still apply. The estate tax damages capital accumulation and thereby hurts investment and productivity growth. Despite raising little revenue, the estate tax can have a substantial impact on the economy because it targets significant sources of wealth creation.

High-Taxing Empire State Loses 3.4 Million Residents in 10 Years
http://news.heartland.org/newspaper-article/2012/06/05/high-taxing-empire-state-loses-34-million-residents-10-years
Elizabeth Harrington of CSSN news reports that New York state lost 3.4 million residents between 2000 and 2010, largely due to high taxation, including a high estate tax. Its estate tax has an extremely low exemption level of $1 million and a progressive rate ranging from 0.8% to 16%. In 2007, New York collected $1.1 billion from its estate and gift tax, more than any other state. But the payoff for this revenue gain has been a declining population as citizens flee to Texas, Florida, and other states with lower tax burdens.

Econ 101: Is the Estate Tax Good or Bad?
http://www.mrc.org/commentary/econ-101-estate-tax-good-or-bad
This article lays out a simple economic argument against the estate tax. The estate tax disincentives savings and increases consumption by wealthy individuals. In the long run this pattern reduces economic productivity and slows economic growth. The article concludes that despite targeting the wealthy, the estate tax primarily hurts the poor and middle class.

2013 Federal Estate Tax: The .99% Verses The .01%
http://www.forbes.com/sites/matthewcampione/2012/06/29/2013-federal-estate-tax-the-99-verses-the-01/
Matthew Campione describes the ineffectiveness of the estate tax. The tax is used as a form of class warfare but the super-rich can often avoid it. Meanwhile, households with a net-worth of $5-$10 million tend to be hit the hardest as legal fees mount up. After a few generations of paying estate taxes, a family with this level of wealth may lose their fortune.

To Reduce the Deficit, Kill the Estate Tax
http://www.forbes.com/sites/realspin/2011/10/25/to-reduce-the-deficit-kill-the-estate-tax/
Stephen Entin and Dick Patten argue that the negative effects of the estate tax are far greater than even most critics realize. The author claims that the estate tax has enormous negative effects on capital accumulation which equates to a loss of over 2% of the US GDP per year. If the tax were repealed, the economic growth would increase tax revenues by $1 trillion over the decade. Entin and Patten cite Milton Friedman for the theoretical groundwork for their argument.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org

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