NCPA - National Center for Policy Analysis

Estate Taxes Inhibit Wealth Accumulation

September 24, 2001

The tax cut package enacted into law last summer includes a gradual reduction in estate tax rates to zero. But in order to keep the 10-year "cost" of the package down, the tax was not permanently repealed, and will come roaring back the year after it dies -- unless Congress acts in the meantime.

Death tax opponents argue that repeal should be made permanent, and the rate cuts accelerated. They say the tax reduces the incentive to accumulate wealth -- and may not yield the federal government any net revenue due to tax avoidance strategies.

Do estate taxes have a negative impact on the accumulation of wealth? Economists Wojciech Kopczuk and Joel Slemrod found that:

  • When the estate tax is levied at a higher marginal rate, the size of the reported largest estates shrinks, relative to national wealth.
  • This could occur because those anticipating being hit by the estate tax are spending more money and effort to avoid the estate tax and are having some success -- or it could be that they are accumulating less wealth by working or saving less.
  • By analyzing individual tax returns, the researchers found that the tax rate prevailing at age 45 or at 10 years before death is more clearly (negatively) associated with reported estates than the tax rate prevailing at death.
  • A 50 percent estate tax rate, for instance, is associated with a 10.5 percent reduction in reported net worth by the richest one-half percent of the population when its effect is fully realized many years later.

This suggests that during the years they are working and investing, potential estate taxpayers are already taking steps to avoid the tax, by avoiding (taxable) wealth accumulation.

Source: David R. Frances, "Estate Taxes Appear to Increase Avoidance and to Reduce Wealth Accumulation," NBER Digest, March 2001; based on Wojciech Kopczuk and Joel Slemrod, "The Impact of the Estate Tax on the Wealth Accumulation and Avoidance Behavior of Donors," NBER Working Paper No. 7960, October 2000, National Bureau of Economic Research.

For NBER article

http://www.nber.org/digest/mar01/w7960.html

For NBER working paper

http://papers.nber.org/papers/w7960

 

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