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 property transferred from a deceased person’s estate to relatives or other parties. The federal estate tax was established World War I to act as a temporary source of defense funds. The U.S. federal estate is now the fourth highest death tax among developed countries. Congress is now considering the Death Tax Repeal Act of 2015 to permanently repeal the federal estate tax.
Proponents of high estate taxes argue the tax creates 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 and acting as a tax on capital and entrepreneurship which slows business activity and destroys jobs while lowering salaries. According to a study from the Joint Economic Committee’s Republican Staff, the federal estate tax has “cumulatively reduced the amount of capital stock in the U.S. economy by over $1.1 trillion in the past century.” Removing the tax would inject these dollars back into the economy.
Repealing the death tax could create much needed economic growth. The National Taxpayers Union points to a recent study from the Tax Foundation which found repealing the death tax would reap an enormous benefit for the economy with nearly 150,000 new jobs and an additional .08 percent in much-needed economic growth over just ten years. The amount of tax revenue lost is far less than most people realize. According to the IRS, the federal estate tax produced around $12.7 billion in revenue in 2013, this accounts for less than .1% of federal revenue.
While proponents of the death tax say the tax is a way to bring equality to the tax system and target the wealthy, death taxes more frequently burden small businesses, especially family farms. Frequently smaller businesses do not have the liquid assets to pay the tax and are forced to reduce investment in their business, cut employees or accept closure or buyouts.
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 stifle investment and entrepreneurship, reduce economic growth, discourage savings, increase the cost of capital, raise interest rates, and bring in 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. Lawmakers 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.
Estate and Inheritance Taxes around the World
Estate and inheritance taxes are poor economic policy. They fall almost exclusively on the domestic capital stock—the accumulated wealth which makes America richer and more productive as a whole. Taxes levied on the capital stock restrict job growth and harm the economy. This study finds repealing the U.S. estate tax would lead to the creation of nearly 150,000 jobs and would eventually increase federal tax receipts by $8 billion per year.
The Economic and Fiscal Effects of Eliminating the Federal Death Tax
The Heritage Foundation estimates eliminating the federal estate tax (and related gift taxes) would boost U.S. economic growth by more than $46 billion over the next 10 years and generate an average of 18,000 private-sector jobs annually. Eliminating the federal death tax would create economic opportunities for American families and free up financial assets for private-sector investment and income growth.
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 says 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, and then reviews the fiscal contribution of each of the estate and gift taxes. In addition, Joulfaian provides data 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 it destroys family farms and closely held businesses – is misleading and even disingenuous. He also argues estate and gift taxes do not threaten aggregate savings, labor supply, or economic growth as its critics maintain.
The Economics of the Estate Tax: An Update
Daniel Miller of the Joint Economic Committee argues the federal estate 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.
Where Not To Die In 2015
Writing in Forbes, Ashlea Ebeling compares the estate and inheritance taxes of different states and highlights several high-tax states as expensive places to die.
Ten Principles of State Fiscal Policy
Heartland Institute President Joseph Bast, Policy Advisor Richard Vedder, and Research Fellow Steve Stanek list the principles states should consider when formulating 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 that provide capital to the economy. Therefore, the estate tax hinders economic production and prosperity.
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 website of Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.