NCPA - National Center for Policy Analysis

Tax Committee Overstates Revenue Loss From Estate Tax Repeal

July 13, 2001

A few weeks before Congress voted to repeal the estate and gift tax, the Joint Committee on Taxation (JCT) sharply increased its estimate of the tax loss from the rollback. In fact, the JCT claimed the federal government will lose more revenue than the tax was projected to collect. That is because it accepted the claim of reform opponents that repeal would enable people to avoid income taxes on the interest, dividends, profits and capital gains. Is this possible?

  • First, without the gift tax, the JCT said, people in higher tax brackets could give large amounts of income-producing assets during their lifetimes to their heirs, without tax penalty, who would pay lower income tax rates than the givers.
  • However, economists Michael Schuyler and Stephen J. Entin argue that bequestors don't have any incentive to speed up transfers because the same reduction in tax rates also applies to assets retained until death, and, furthermore, the previous tax regime favored early transfers through such provisions as the annual gift tax exemption.
  • Second, the JCT said people might avoid paying capital gains taxes on inheritance by making sham transfers during their lifetimes.
  • However, the law already contained an effective anti-tax-avoidance provision: if transferred assets are returned within one year through a bequest, capital gains taxes are assessed from when the asset was first acquired (carryover basis).

The JCT estimated repeal would cost $660 billion -- more than 60 percent larger than the $410 billion the estate and gift tax would collect over the next 10 years. The revised estimates led Congress to stretch out estate tax repeal and enact new anti-tax-avoidance provisions. But studies suggest that due to tax avoidance strategies, the estate tax did not raise any net revenues.

Source: Michael Schuyler and Stephen J. Entin, "Faulty Revenue Scoring: Life Support for the Death Tax," IRET Congressional Advisory No. 114, April 30, 2001, Institute for Research on the Economics of Taxation, 1730 K Street, N.W., Suite 910, Washington, D.C., 20006, (202) 463-1400.


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