NCPA - National Center for Policy Analysis

Case For Abolishing Death Taxes

August 18, 1999

The U.S. estate tax is not a significant source of federal revenues, and it disproportionately burdens family-owned small businesses and farmers. The tax applies to assets of more than $650,000 -- rising to $1 million in 2006. Since many workers with modest incomes can now expect to have $1 million or more at retirement, an increasing number of inheritances will be hit with the tax.

  • The lowest estate tax rate is 18 percent, but 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.
  • The top U.S. inheritance tax rate of 55 percent is the second highest in the world.
  • In fiscal year 1998, the estate tax raised just $24.6 billion, or just 1.3 percent of total federal revenues of $1.8 trillion.

The value of farms and businesses make their owners' estates subject to the tax, and heirs often have to sell the farm or business to pay it. For example, due to the estate tax, 51 percent of family businesses would have significant difficulty surviving in the event of a principal owner's death, according to a recent survey. The failure of 90 percent of small businesses after the death of the founder can be traced to the inheritance tax burden, says the National Federation of Independent Business.

And because of legal estate planning techniques, estate taxes as a share of gross estates actually fall for those with estates above $20 million.

Congress has approved phasing out the death tax by 2010. However, President Clinton has vowed to veto the bill.

Source: Bruce R. Bartlett (NCPA senior fellow), "Why Death Taxes Should Be Abolished," Policy Backgrounder No. 150, August 18, 1999, National Center for Policy Analysis, 12655 N. Central Expy., Suite 720, Dallas, Texas 75251, (972) 386-6272.

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