Why Death Taxes Should Be Abolished

Policy Backgrounders | Taxes

No. 150
Wednesday, August 18, 1999
by Bruce Bartlett


According to the Federal Reserve, household wealth in the United States has doubled in the last 10 years, from $21.5 trillion in 1988 to $43.2 trillion last year. Since the population has only risen by about 10 percent over this period, wealth per capita has increased enormously. To be sure, much of this increase accrued to those who were already rich. But the assets of the nonwealthy have also grown, especially if one includes assets held in 401(k) plans. Even those with modest incomes can now expect to have $1 million or more at retirement if they save early and invest aggressively. That is why the estate tax will be an issue of contention for years to come.

At present, the estate tax applies to assets of $650,000 or more at death. This figure is scheduled to rise to $1 million in 2006, a rate of increase that barely keeps up with inflation. Although the lowest estate tax rate is 18 percent, because the exemption is in the form of a tax credit, those with estates larger than $650,000 will pay 37 percent of each additional dollar to the federal government.

Figure I - International Comparison of Top Marginal Death Tax Rates

"Even those with modest incomes can now expect to have $1 million or more at retirement if they save early and invest agressively"

As Figure I shows, at 55 percent, the top estate tax rate in the U.S. is among the highest in the world. According to the American Council for Capital Formation in Washington, among major countries only Japan has a higher top rate, and it applies to estates of more than $15.3 million, whereas the top U.S. rate hits at just $3 million of assets. Even many countries with governments much more to the left than ours have estate tax rates that are signficiantly lower. Sweden has a 30 percent rate, Denmark has a rate half that, and Canada has no estate tax at all. (Canada does tax capital gains at death, which the U.S. does not, but the top capital gains rate there is still well below our top estate tax rate.)

"A number of countries have already abolished the estate tax."

Little wonder, then, that many baby boomers still in the prime of life are already fretting about how to avoid the estate tax. Talk show host Oprah Winfrey spoke for many when she told her audience, "I think it's so irritating that once I die, 55 percent of my money goes to the United States government....You know why that's so irritating? Because you have already paid nearly 50 percent [when the money was earned.]"

To be sure, not many people are in Miss Winfrey's tax bracket, but increasing numbers of Americans are falling into the estate tax net - a region once reserved for the truly wealthy.

The federal estate tax was first enacted in 1916 on estates larger than $50,000 (the equivalent of $720,000 today). The top rate was 10 percent. However, the revenue yield from the tax was small because people simply gave away their assets tax-free during their lifetimes. This led to establishment of a gift tax to augment the estate tax in 1924. Since 1976 the estate and gift taxes have been unified into one tax system.

The estate and gift tax is now the federal government's least significant revenue source. In fiscal year 1998 it raised just $24.6 billion, according to the Treasury Department. With total federal revenues of $1.8 trillion, the tax contributed just 1.3 percent. However, while the tax is insignificant in terms of federal revenue, it is very significant economically. It wastes resources. It discourages work, saving and investment. And it does virtually nothing to equalize the distribution of wealth. For these reasons, it should be abolished.

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