The Economics of the Estate Tax
Text courtesy of the US Congress - 1998
JEC
Executive Summary
This analysis examines the arguments for and
against the federal estate tax and concludes that the estate tax generates costs
to taxpayers, the economy and the environment that far exceed any potential
benefits that it might arguably produce.
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 percent to nearly 80 percent 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 forces families to develop environmentally sensitive
land.
- The estate tax violates the basic principles of a 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 it penalizes
work, saving 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 of 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 result in losses
under the income tax that are roughly the same size as estate tax revenue.
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