WEALTH, INHERITANCE AND THE ESTATE TAX
September 22, 2006
As Congress continues debate over reduction and possible elimination of the estate tax, a new study from the National Center for Policy Analysis (NCPA) undermines the chief argument made by proponents of the tax - that estate taxation prevents the concentration of wealth in the hands of financial dynasties. The report shows that the contribution of inheritances to the distribution of wealth in the United States is surprisingly small.
"It is commonly assumed that wealthy people inherit much of their wealth," said Jagadeesh Gokhale, a senior fellow at the Cato Institute who authored the report. "An individual's skills and personal choices are the most important determinants of wealth. Inheritances play only a minor role." According to the report:
- Wealth is distributed very unequally: The top 1 percent of households (with accumulated wealth of $13.8 million or more) holds about 23 percent of all wealth, and the top 5 percent ($4.02 million or more) holds 51 percent of all wealth.
- However, if we could somehow tax away every single dollar of wealth due to inheritance of the top 1 percent, it would reduce their share of the nation's total wealth by only 4 percentage points.
- If we could tax away all the wealth due to inheritance of the top 5 percent, it would reduce their share of the wealth by only 7 percentage points.
The study also found that being raised in a rich family does not guarantee that these children will be rich themselves when they retire. For example:
- More than three-fourths children in the top 5 percent of households are no longer in the top 5 percent when they retire.
- More than half of children of parents in the bottom 50 percent of the wealth distribution will be in the upper 50 percent when they retire.
"We don't need to tax people when they die to prevent dynasties and a permanent upper class," said NCPA President John C. Goodman. "This study undercuts virtually every argument that has been made in favor of estate taxation."
Source: Jagadeesh Gokhale and Pamela Villarreal, "Wealth, Inheritance and the Estate Tax," National Center for Policy Analysis, Policy Report No. 289, September 2006.
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