The Heritage Foundation

WebMemo #189 on Taxes

January 23, 2003

January 23, 2003 | WebMemo on Taxes

Death Taxes: Killing the Economy

On January 7 of this year, President Bush once again called upon Congress to permanently repeal federal death taxes, and well he should.  Not only does current law amount to a multi-billion dollar "bait and switch" on future taxpayers, but the moral and economic harm of death taxes also continues unabated despite the intentions of those Members of Congress who voted for repeal in 2001.

 

A year and a half ago, Congress passed and the President signed the most comprehensive and far-reaching tax cut laws of the past 20 years.  Two of the three federal death taxes-estate and generation skipping taxes but not gift taxes-are scheduled for repeal in 2010 as part of that tax cut plan.  However, these same taxes (and, indeed, most of the other provisions of the big tax cut bill) will be re-enacted in 2011 as a result of Congress's need to comply with its own budget rules.  Now, those taxpayers who think their estates may have to pay a federal death tax must plan as though Congress had never acted. Unless, of course, these taxpayers can somehow manage to die in 2010.

President Bush is right to call for the permanent repeal of federal death taxes.  He and a majority of voters know that death taxes are really taxes on economic virtue.  They know that death taxes undermine important American values of hard work, entrepreneurship, thrift, and intergenerational savings.  Death taxes put small and independent business people at a severe disadvantage when they compete with corporations that will never face the prospect of liquidating an ongoing enterprise in order to pay a tax with rates above 50 percent. 

 

President Bush and a majority of voters also know that this tax hits women and minority business people especially hard, since they tend to save in their businesses more than the typical business owner.  If you have plowed most of your profits back into your business and your home, its easy build an estate that exceed the $675,000 threshold above which death taxes are due.  In many areas of the country, that level could be attained by summing the value of a middle-class house, a dry cleaning or plumping business, and an average pot of savings for retirement.  Death taxes truly are the nightmare of the American dream. 

 

Not only, however, do death taxes wreck businesses and puncture family dreams, but they seriously impede job creation and wage growth for Americans who will never have to file a federal estate tax form.  Death taxes do this principally by increasing the cost of capital, which makes it more expensive for businesses large and small to borrow funds for expanding their activities or replacing worn out machines.  Because this increase in capital costs is directly linked to death taxes, people looking for work will find it harder to find employment, new machines that could make workers more productive and raise their wages will be in shorter supply, and incomes of households and government will grow less swiftly than they would if death taxes were permanently repeals.

 

How much harm do death taxes do to the economy?  My colleague, Al Goyburu, recently answered this question in an important Center for Data Analysis Report entitled "The Fiscal and Economic Effects of Repealing Federal Estate, Gift, and Generation-Skipping Taxes."  Mr. Goyburu found that the average effects of repeal over the next ten years would:

Add$14.7 billion (adjusted for inflation) to the GDP;

Add118,000 jobs to the U.S. economy;

Reduce nationwide unemployment by 27,000 persons;

Raise U.S. personal disposable income by an inflation-adjusted $11 billion;

Increase non-residential net capital stock by $25.1 billion and lower the user cost of capital by 0.3 percent;

Leave relative price levels and key interest rates unaffected, in spite of the stimulating effect repeal would have on economic activity; and

Reduce the nation's publicly held debt by $5.7 billion.

These significant effects at the national level would be realized in every state in the Union, especially those that bear heavy death tax burdens.  Recent data from the IRS show exactly where those burdens are.  The following table lists the number of estate and gift tax forms that were sent to Washington in 2001.  The table also shows the percentage of death tax returns that estates in each state filed out of the national total.

(click table to enlarge)

About the Author

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