NCPA - National Center for Policy Analysis


October 9, 2006

The estate tax generates little revenue for the federal government.  Federal budget data indicates that the estate tax will raise $28 billion this year, accounting for only 1.2 percent of total federal revenues.  Furthermore, it is estimated that the estate tax costs the private sector one dollar to comply for every dollar in revenue.  This means that the true cost of the estate tax to the economy this year is at least $56 billion, says Danielle Georgiou, a policy intern with the National Center for Policy Analysis.

Capital gains tax revenue could increase if the estate tax were repealed.  That would occur if the current stepped-up basis on assets were replaced by carry-over basis. 

According to Congress' Joint Committee on Taxation (JCT):

  • Much of the value in large estates consists of unrealized capital gains, which currently avoid capital gains taxes because asset basis is stepped-up to market value at death.
  • That has the effect of reducing federal revenues by more than $50 billion annually.

Under current law, when the estate tax disappears in 2010, any assets that are sold will be taxed on a carry-over basis -- in effect, a capital gains tax on their value since they were first acquired by the decedent.  This would allow the government to pick up a part of the $50 billion in lost revenue to offset the revenue loss from estate tax repeal.  The Senate bill proposed a permanent carry-over basis, but the partial repeal passed by the House retains the stepped-up basis.  However, even if stepped-up basis is retained, eliminating the estate tax would increase the capital stock and thus produce higher incomes and more income tax revenues, says Georgiou. 

Congress is not considering full repeal at the moment; but lowering the estate tax rate and raising the exemption would be a step in the right direction.  However, the estate tax is inefficient, economically harmful, does a poor job of redistributing wealth and doesn't raise much revenue.  A better policy would be permanent repeal, says Georgiou.

Source: Danielle Georgiou, "Killing the Death Tax," National Center for Policy Analysis, Brief Analysis No. 574, October 9, 2006.

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