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)