The Estate Tax: Even Worse than Republicans Say

September 7, 2012

On July 25, Joint Economic Committee (JEC) Republicans published a report criticizing the federal estate tax. The report called for either a significant reform or outright repeal of the estate tax. But while the JEC Republican report makes strong arguments, David Block and Scott Drenkard of the Tax Foundation hope to strengthen the case for repeal with additional evidence of compliance burdens inherent in the estate tax. Compliance costs are much more significant than is often understood, so much so that tax revenue is likely to actually increase upon repeal regardless of economic growth patterns in the coming years.

The justification for the estate tax has historically been twofold: the estate tax raises revenue and reduces income inequality.

  • The JEC report effectively shows that the estate tax fails on both accounts.
  • The estate tax is the smallest source of revenue of any major tax in the United States.
  • In 2011, it raised roughly 0.05 percent of all federal revenue.
  • In 2012, projections show that the estate tax will only raise 0.42 percent of federal tax collections.
  • Not only is the tax revenue from the estate tax fairly insignificant, but the charitable deduction, along with "stepped up basis" asset valuations, ensure that income and capital gains tax revenues are kept artificially low as taxpayers make economic decisions to avoid the estate tax.
  • The revenue gained from the estate tax is largely illusory, as lost revenue from estate tax repeal would be made up in other areas of the tax code.

The estate tax is often defended under the premise that it promotes equity, but the tax fails to achieve this goal.

  • Inheritance accounts for just 2 percent of income inequality according to one study, and other sources find that only 27 percent of wealthy households accumulated any wealth at all through inheritance.
  • As the JEC Republicans highlight, only one in five children of a wealthy parent will be wealthy at their retirement.
  • In effect, the estate tax does not soak the rich; it instead soaks their less-than-wealthy heirs.

In addition, the estate tax reduces savings and acts as a drag on the economy through compliance costs. Its repeal would increase economic growth and some studies even find that it would raise tax revenues. The JEC report makes a strong argument for estate tax repeal, but after accounting for the higher tax revenue and larger compliance costs shown by Block and Drenkard, the estate tax becomes indefensible.

Source: David Block and Scott Drenkard, "The Estate Tax: Even Worse than Republicans Say," Tax Foundation, September 4, 2012.

 

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