The Heritage Foundation

Backgrounder #1428 on Taxes

April 4, 2001

April 4, 2001 | Backgrounder on Taxes

Time to Repeal Federal Death Taxes: The Nightmare of the American Dream

In 1996, few in Washington or around the country believed that repealing the estate, or death, tax was possible. Today, not only does it appear likely, but support in Congress is strong. The House is now considering a bill, H.R. 8, which the Ways and Means Committee passed on March 29, 2001, to phase out federal death taxes over a 10-year period. The leading reform legislation in the Senate is S. 275, the Estate Tax Elimination Act of 2001. This bill proposes to repeal all federal death taxes immediately, to exempt about $3 million in family assets from capital gains taxation, and to tax intergenerational wealth transfers above this amount at the long-term capital gains tax rate of 20 percent. The leading immediate repeal bill in the House is H.R. 330, the Family Heritage Preservation Act, which already enjoys 179 cosponsors just two months after its introduction.

Bolstered by President George Bush's own tax proposal that includes death tax repeal as a major element, Congress should make eliminating the death tax a priority this year. By majorities consistently above 60 percent since the last presidential campaign began, voters support death tax repeal. Evidence is growing that the death tax:

  • Reduces economic growth, which hurts the jobs and incomes of the very people wealth redistribution was intended to aid;

  • Increases the cost of capital, slowing research and development and investment in assets that would increase worker productivity and wages;

  • Keeps interest rates higher on home loans and other major purchases;

  • Raises very little revenue--in fact, the death tax may cost the government and taxpayers more in administrative and compliance fees than it raises in revenue; and

  • Leads to tax evasion. Wealth distribution tax policy encourages well-to-do and middle-class families to find legal ways to avoid the tax collector.

The economic cost of the estate tax is many times greater than the revenue it produces, and its reach into American households extends far beyond those few who pay it. Every day, Americans make social and economic decisions with the estate tax in mind. Investing in a business is one way to save--for some families, the only way. Every available dollar goes into the family dry-cleaning business, restaurant, or trucking company, because the business creates an asset for their children and incomes for the owners. All of the financial security provided by these businesses is put at risk if the owner dies with a taxable estate.

Small-business owners, particularly minority owners, suffer anxious moments wondering whether the business they hope to hand down to their children will be destroyed by the death tax bill. Factories drone on with worn-out equipment that would be replaced if capital costs fell. Women whose children are grown struggle to find ways to re-enter the workforce without upsetting the family's estate tax avoidance plan. Rich people buy vacations and fine art rather than start new businesses and create more jobs, because the government will claim more than half of everything they cannot spend.

The Effects of Death Tax Repeal.
While support for death tax repeal is growing, evidence that doing so would have good effects is also mounting. A new Heritage Foundation econometric simulation of estate tax repeal finds that it would lead an increase of 142,000 jobs per year over the next 10 years, growth in inflation-adjusted disposable income by an average of $22 billion, and enough new taxable income that total federal revenues would fall by less than half the amount expected. This study confirmed the findings of a previous Heritage analysis in 1996.

A study conducted in 1993 by Richard Wagner of George Mason University found similar effects. Within eight years of eliminating the tax, annual production would increase by $80 billion, creating an additional 250,000 jobs and $640 billion more in capital stock. More recently, a study by the
Institute for Small and Emerging Business found that immediate estate tax repeal and the introduction of capital gains taxes on intergenerational wealth transfers would see employment rise by an average of 131,000 per year, after-tax disposable income for average income households increase by an average of $18.1 billion after inflation, and inflation-adjusted GDP jump four-tenths of a percent. Federal revenues, the study predicts, would recover from the "loss" of estate tax revenue by the fifth year following repeal.

Gary and Aldonna Robbins published similar results for the Institute for Public Innovation in 1999. Using the Fiscal Associates Tax Model, they found that death tax repeal would likely result in average employment gains of 112,000 jobs, federal revenues would recover completely by the seventh year, and much of this strong growth in revenue would come from the boost given to the nation's capital stock. Moreover, U.S. capital would be higher by almost $1.5 trillion following repeal than it will be without it.

Certainly, given the relatively small amount of annual federal revenues raised, the complex estate and gift tax cannot be justified as playing an important role in financing the government. In fact, the unified estate and gift tax brings in less than 2 percent of total federal revenues.

The policy of using the estate tax to redistribute economic power leads to a distorted distribution of consumption and a less productive economy. Both of these unexpected outcomes worsen the economic condition of the less economically powerful. It is time for Congress to repeal this immoral tax on productivity, the nightmare of the American dream. Eliminating the estate tax will stimulate the economy, provide more jobs, and promote investment in the kind of equipment that elevates productivity and supports higher wages for American families today and increases long-term prosperity.

William W. Beach is the John M. Olin Fellow in Economics and Director of the Center for Data Analysis at The Heritage Foundation.

About the Author

William W. Beach Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis