NCPA - National Center for Policy Analysis


June 12, 2009

The federal estate tax has a substantial impact on family businesses, and eliminating it would raise the probability of hiring by 8.6 percent, increase payrolls by 2.6 percent and expand investment by three percent, according to a new analysis by Douglas Holtz-Eakin and Cameron Smith, of DHE Consulting.

To get a sense of the magnitude of these estimates, recall that roughly 50 million workers are employed in small business. If small business payrolls were to rise by 2.6 percent, this translates to roughly 1.5 million additional small business jobs.  Alternatively, a higher estate tax that lowers payrolls by.9 percent and reduces over 500,000 jobs.

To estimate the impact of estate taxation on the cost of capital, the authors reason that taxing capital via the marginal statutory estate tax is comparable to confiscatory annual taxes on the rate of return to capital:

  • Expecting to pay a marginal estate tax rate of 45 percent (current 2009 law) is equivalent to an annual tax of over 150 percent over a five-year horizon.
  • Over longer periods, the equivalent tax declines, but remains quite substantial.
  • Eliminating the estate tax, accordingly, has a fairly dramatic impact on the incentives to accumulate capital.
  • Similarly, allowing current law to permit the top effective marginal estate tax rate to reach 60 percent would be tantamount to an increase in the annual rate of marginal capital taxation of between 14 percent (over 30 years) to 74 percent (over five years).

Allowing the tax to revert back to the high marginal tax rates and low exemption of the 1990s would have a crushing impact on businesses, workers, and on the U.S. economy as a whole.  Eliminating the estate tax would increase the investment outlays, hiring propensities, and size of family business payrolls, say Holtz-Eakin and Smith.

Source: Douglas Holtz-Eakin and Cameron T. Smith, "Changing Views of the Estate Tax:  Implications for Legislative Options" Washington Policy Center/American Family Business Foundation, 2009.


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