NCPA - National Center for Policy Analysis


October 1, 2009

Congress is facing a tax deadline, say Terry Neese, a distinguished fellow, and Bethany Lowe, a research assistant, both with the National Center for Policy Analysis (NCPA).  Under legislation passed in 2001, the federal estate tax is being phased out: The tax rate is falling and the value of the property of the deceased that is exempted from the tax is rising.  The tax is scheduled to disappear in 2010, but it will return in 2011 at pre-2001 rates -- up to 55 percent for estates valued in excess of $1 million.  The Senate voted in April 2009 to reduce the rate of the revivified tax to 35 percent, but the House of Representatives has not acted.

Support for the estate tax is based largely on the idea that inheritances are a major source of wealth inequality, say Neese and Lowe.   However, an NCPA analysis of data from the 2004 Survey of Consumer Finances found that among the wealthiest 1 percent of Americans only 17 percent of their wealth came from bequests.

Estate tax advocates claim that it raises considerable sums for the federal government.  In reality: 

  • The tax makes up less than 3 percent of total federal tax proceeds.
  • It reduces capital formation, thereby lowering productivity, wages, employment, and federal payroll and income tax revenues.

The Heritage Foundation found that as a result of complete estate tax repeal:

  • The U.S. economy would average as much as $11 billion per year in extra output.
  • An average of 145,000 new jobs per year could be created and personal income could rise by an average of $8 billion annually above current projections.
  • The federal budget deficit would decline because increased revenue generated by increased economic growth would more than compensate for estate tax revenue.

Small business owners and other middle-class Americans must not be deceived by the misleading claims of estate tax supporters.  Even if the tax is allowed to go away in 2010, the increase when it returns in 2011 will only further impede productivity.  If Congress truly wants to stimulate the economy, they ought to end the estate tax permanently, conclude Neese and Lowe.

Source: Terry Neese and Bethany Lowe, "Estate Tax Myths," National Center for Policy Analysis, Brief Analysis No. 678, October 1, 2009.

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