Research & Commentary: Estate Taxes

Published August 6, 2012

Few taxes imposed by state and local governments are more controversial than the estate tax, popularly referred to as the “death tax.” Estate taxes are levies on the net value of the estate of a deceased person before distribution to the heirs.

The estate tax rate is scheduled to automatically increase, and the amount excluded from the tax will plummet from $5 million to $1 million, if Congress does not vote to extend the current rates. According to Americans for Tax Reform, the top marginal estate tax rate will leap twenty percentage points, to 55 percent, and an additional 5 percentage point surtax will be levied on estates between $10 million and $17 million, creating a top effective rate of 60 percent.

Proponents of high estate taxes say the coming tax hike would create additional revenue for government and benefit charities by increasing the incentive to give to them prior to death. Opponents note the estate tax is double taxation and places an undue burden on family-owned businesses and farms.

The predicted economic effects of an estate tax hike paint a bleak picture. According to a study from the American Family Business Foundation, reinstating the higher estate tax will damage small business hiring: “At the rate of 55%, the estate tax will destroy over 1.3 million small business jobs. At a 45% rate, the estate tax will destroy over 1 million jobs. At a 35% rate, the estate tax will destroy over 850,000 jobs.”

Dick Patten, president of the American Family Business Institute (AFBI), said, “After a lifetime of saving, investing, and building businesses, farms or other operations, it is wrong for the IRS to confiscate 55 percent, 45 percent or even 35 percent of what has been left to another generation’s stewardship.”

Estate taxes are a form of double taxation that stifles investment and entrepreneurship, reduces economic growth, discourages savings, increases the cost of capital, raises interest rates, and brings relatively little revenue. Lowering the estate tax or eliminating it completely would create jobs and promote savings and investment while not penalizing individuals who saved for the next generation. The federal government and state legislatures should consider reducing or eliminating this tax.

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

‘Rich States, Poor States’ Documents Benefits of Low Taxes
In the fifth edition of the American Legislative Exchange Council’s Rich States, Poor States publication, the authors include a case study of one of the most egregious state taxes: the unpopular and economically damaging estate or “death tax.” They incorporate anecdotal evidence and state economic data to show why the death tax is one of the worst possible taxes for state economies.

Another State Death Tax Kicks the Bucket, Will More Fall?
Ashlea Ebeling of Forbes magazine discusses the efforts of the Indiana legislature and Gov. Mitch Daniels to lower the estate tax rate and increase the amounts exempt under the tax.

Don’t Die in 2013: Confiscatory 55% Death Tax Set to Take Effect
Americans for Tax Reform examines the upcoming increase in federal estate taxes and argues the higher rates will discourage investment and savings while limiting economic growth.

Ohio Buries Death Tax, Cuts Property and Income Taxes
Nick Baker writes in The Heartlander digital magazine about the successful effort to repeal Ohio’s estate tax, which ends on January 1, 2013. Ohio is one of 22 states that have an estate or inheritance tax, as does the District of Columbia. Gov. Kasich signed the budget after he and lawmakers crafted a spending plan that not only closed the state’s nearly $7.7 billion deficit but also cut property and income taxes, reduced spending, and privatized some state agencies.

The Moral Case against the Death Tax
This Cato Policy Analysis by Edward McCaffery is a primer on the basics of the death tax. It finds the tax fails to achieve most—and quite possibly any—of the objectives its supporters promote.

Interstate Competition and State Death Taxes: A Modern Crisis in Historical Perspective
Jeffery Cooper of the Quinnipiac University School of Law argues the current decline of state death taxes is not an isolated modern event but rather another step in a decades-long interstate battle to attract and retain wealthy citizens.

The Federal Estate Tax: History, Law, and Economics
David Joulfaian of the U.S. Department of the Treasury traces in this manuscript the evolution of the estate tax since its enactment. He provides a brief legislative history and description of the structure and features of the tax, then reviews the fiscal contribution of each of the estate and gift taxes. In addition, he provides trends on the number of individuals and households touched by the tax as reflected by the number of returns filed over time, and he gives a comprehensive review of the behavioral effects of the tax.

Straight Talk About the ‘Death’ Tax: Politics, Economics, and Morality
Dennis J. Ventry Jr. of the University of California-Davis criticizes the political, economic, and moral cases against wealth-transfer taxes. Ventry argues the rhetoric surrounding the effort to repeal estate and gift taxes—particularly the charge that it destroys family farms and closely held businesses—is misleading and even disingenuous. He also argues estate and gift taxes do not threaten aggregate saving, labor supply, or economic growth as its critics maintain.

The Economics of the Estate Tax: An Update
Daniel Miller of the Joint Economic Committee examines the arguments for and against the federal estate tax and concludes the tax generates costs to taxpayers, the economy, and the environment that far exceed any potential benefits it might arguably produce. The paper updates a previous Joint Economic Committee report on the federal estate tax.

The Economic Case against the Death Tax
In this Heritage Foundation Backgrounder, Curtis Dubay details a replacement for the death tax and explains why Congress must kill the death tax—now.

How the Death Tax Kills Small Businesses, Communities—and Civil Society
Writing for the Heritage Foundation Backgrounder series, Patrick Fagan argues the death tax makes a direct assault on a community’s economy by undermining small business, a primary source of sustenance for communities.

Growth Consequences of Estate Tax Reform: Impacts on Small and Family Businesses
Douglas Holtz-Eakin and Cameron T. Smith of the American Family Business Foundation examine the impacts of a higher estate tax rate on asset accumulation, small and family businesses’ cost of capital, investment outlays, desire to hire, size of payrolls, and jobs. In each instance, raising the estate tax has significant negative effects.

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 and Tax News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at