NCPA - National Center for Policy Analysis


June 7, 2006

People can increase their productivity and labor by acquiring skills and training (human capital), by buying or inheriting physical capital to use with their labor, or by seeking employment that will let them work with other people's physical capital.

By discouraging capital formation, the estate tax makes it harder to combine labor with capital, which reduces the demand for labor and reduces opportunities for on-the-job training. It insures that the poor remain poor, and it keeps start-up businesses from growing to compete with older and bigger firms, says Stephen J. Entin, president and executive director of the Institute for Research on the Economics of Taxation.

  • One of the worst features of the estate and gift tax is that the smallest and newest businesses, those with the least cash, are the least able to survive the tax.
  • These include a large share of the businesses created by minorities. The estate tax makes it harder for successful minority business owners to pass the business on to the next generation.

Furthermore, among the richest citizens, most wealth is earned -- not inherited. One study found that among the wealthiest 5 percent of the population:

  • Most of the wealth (92.5 percent) was from earnings and thrift.
  • Only 7.5 percent was from inheritance.

According to IRS figures, the estates of the middle class lose a greater percent of their value to the estate tax than those of the super rich. Perhaps the middle class cannot afford the most sophisticated estate planning techniques, or their assets are not of the type that can most easily be protected, says Entin.

Because it is an inefficient way to raise revenue and negatively affects the economy, Congress should permanently repeal the estate tax, says Entin.

Source: Stephen J. Entin, "We All Pay for the Estate Tax," National Center for Policy Analysis, Brief Analysis No. 556, June 6, 2006.

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