Wealth, Mobility, Inheritance And The Estate Tax

Studies | Taxes

No. 235
Thursday, June 01, 2000
by Bruce Bartlett


Executive Summary

The federal estate tax has been instituted and repealed several times. Usually it has been seen as a source of revenue, rather than a means of redistributing wealth. But the current tax is clearly designed to redistribute wealth: it is imposed on estates with a value of as little as $675,000 and rises rapidly to an effective tax rate of 60 percent - the second highest estate tax rate of any country in the world.

Yet the estate tax does less to redistribute wealth than the continual churning of the American economy. Because wealth and income are both highly mobile in the United States, most fortunes are earned, rather than inherited, and rarely survive past the second generation.

  • One study found that among the top 5 percent of households ranked by wealth, inheritances accounted for less than 8 percent of assets.
  • A recent study of U.S. millionaires found that 80 percent acquired their wealth in a single generation, without the benefit of inheritances.
  • U.S. Trust Corporation surveyed the wealthiest 1 percent of Americans and found that inheritances were a significant source of wealth for only 10 percent of respondents.

However, to the extent that the estate tax reduces parents' ability to leave an estate to their children, it will have a negative effect on their willingness to accumulate wealth through work, saving and investing.

Through expensive estate planning, the very wealthy are able to minimize their estate tax burden; consequently the heaviest burden falls on those who accumulate smaller estates. As a result, more than 50 percent of all estate tax revenue in 1997 came from estates of under $5 million. In fact, the effective tax rate is lower on estates above $20 million than those between $2.5 million and $20 million.

For these reasons, the greatest impact of the estate tax is on small, family-owned farms and businesses. The effects can be devastating. According to a recent survey:

  • Fifty-one percent of family businesses would have significant difficulty surviving in the event of a principal owner's death, due to the estate tax.
  • Another 14 percent of businesses said it would be impossible for them to survive.

As the nation's wealth rises, more and more of those clearly in the middle class are affected by the estate tax, or at least believe that they might be. Thus, although just 2.03 percent of adult deaths in the United States are expected to result in taxable estates this year, the public supports elimination of the estate tax by a margin of almost three to one.

The wealthy benefit society in many ways, and the pursuit of wealth - including the desire to pass it on after death - is a major motivation for work, saving, investment, risk-taking, invention, innovation and entrepreneurship for many of our most productive citizens. In the process of acquiring their wealth, they create far more wealth for society.

Not only should the estate tax be abolished, but the war on wealth should cease.

I take it that it is best for all to leave each man free to acquire property as fast as he can.  Some will get wealthy.  I don't believe in a law to prevent a man from getting rich; it would do more harm than good.

Abraham Lincoln
March 6, 1860

You ought to be able to leave your land and the bulk of your fortune to your children and not to the government.

Hillary Rodham Clinton
April 26, 2000


Read Article as PDF