NCPA - National Center for Policy Analysis

THE ECONOMICS OF THE FEDERAL ESTATE TAX

June 6, 2006

Estate taxes are commonly assumed to be borne by wealthy taxpayers. As a result, it is argued that they are an efficient mechanism to redistribute income within society. Furthermore, it is commonly argued that estate taxes are an important federal revenue source that should be maintained. Both arguments, however, rely on questionable assumptions, say economists Andrew Chamberlain, Gerald Prante and Patrick Fleenor.

  • Once the tax-shifting behavior of estate holders is taken into account, the economic incidence of the estate tax may be much less progressive than is commonly assumed, making it a blunt instrument for income and wealth redistribution.
  • The estate tax has never been an important federal revenue source, typically accounting for 1 to 2 percent of federal collections. A growing body of economic research suggests the tax may raise zero revenue or even cost the federal government more in income taxes than the revenue it generates, once widespread estate-tax avoidance is accounted for.

Furthermore, the estate tax is a strong disincentive for entrepreneurship:

  • A 1994 study found that the estate tax's 55 percent rate had roughly the same effect as doubling an entrepreneur's top effective marginal income tax rate.
  • The estate tax has also been found to impose a large compliance burden on the U.S. economy.
  • Economic studies estimate the compliance costs of the federal estate tax are roughly $1 for every dollar of revenue raised, making it one of the nation's most inefficient revenue sources.

Source: Andrew Chamberlain, Gerald Prante and Patrick Fleenor, "Death and Taxes: The Economics of the Federal Estate Tax," Tax Foundation, June 2, 2006; based upon: Andrew Chamberlain, Gerald Prante and Patrick Fleenor, "Death and Taxes: The Economics of the Federal Estate Tax," Tax Foundation, Special Report No. 142, May 2006.

 

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