ECONOMIC AND FISCAL EFFECTS OF THE ESTATE TAX
January 28, 2010
Of all the taxes in the U.S. tax system, the estate tax probably does the most damage to output and income per dollar of revenue raised. The high rates discourage saving and investment at the margin, while the base amount that is exempted from the tax reduces the average tax rate and tax revenues. A tax with a large difference between its average and marginal rates does far more damage per dollar of revenue raised than a lower rate on a broader base, says Stephen J. Entin, President and Executive Director of the Institute for Research on the Economics of Taxation.
If estate tax rates revert to pre-2001 levels:
- Private sector output and labor compensation would be cut by $183 billion and $122 billion, respectively.
- Gross domestic product (GDP) would eventually be reduced by $183 billion.
- By contrast, repealing the estate tax entirely would boost labor income by $79 billion and add $119 billion to GDP.
Furthermore, the loss in GDP, wages and other income reduces other tax collections by more than the estate tax brings in -- resulting in a net revenue decrease from having the tax, explains Entin. One source of loss comes from giving assets to one's heirs over many years prior to death. Indeed, Professor B. Douglas Bernheim of Stanford University estimates that estate tax avoidance by giving assets to children, most of whom are in lower income tax brackets than their parents, costs more in income tax revenue on the earnings of the assets than the estate tax picks up.
The economy, the pretax and post-tax incomes of workers, savers, and investors, and federal, state, and local revenue would all be higher if the estate tax was eliminated, says Entin.
Source: Stephen Entin, "The High Marginal Cost of the Estate Tax," National Center for Policy Analysis, Brief Analysis No. 688, January 28, 2010.
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