the movie "Groundhog Day," Bill Murray's character suffers a
perpetual Groundhog Day--every morning he awakes, the same day, the
same circumstances, the same pitfalls greet him almost anew. But
only when he learns to measure up to the day is he
Wednesday, April 13, is Groundhog Day for the House of
Representatives. On that day, the House will consider H.R. 8, a
bill to permanently repeal the federal death taxes. The House
considered this same bill, identically numbered, in 2003, and the
same reasons that made repeal of the death taxes good policy then
still apply today. The House passed H.R. 8, but the Senate balked.
Heritage's William Beach wrote this piece in 2003, and we republish
it today. Heritage will continue to circulate it each time that
Congress considers correcting, as Beach put it, "the peculiar way
it dealt with death tax repeal in 2001"--unless and until, that is,
this Groundhog Day finally passes.
The House of Representatives will likely vote
this week on legislation -- H.R. 8 -- to permanently remove
estate taxes from the tax code beginning in 2011.
By doing so, Congress will correct the
peculiar way it dealt with death tax repeal in 2001, as well as
fulfill its promise of ending this tax on economic virtue and
productivity that has done considerable damage to the nation's
economic and community life.
Towards Good Tax Policy
The Economic Growth and Tax Relief Reconciliation Act of 2001
increased the amount that taxpayers can exempt from estate and gift
taxes and slowly reduced the rate over the period 2002 through
2009. Then, the Act repealed death taxes for one year, 2010, before
restoring them at their 2003 levels in 2011.
Congress created this bizarre fiscal hiatus in
order to enact all of the tax policy changes given the amount of
money it had set aside through its budget resolution for tax
relief. Compounding this difficult task was a last-minute estimate
by the staff of the Joint Committee on Taxation (JCT) of how much
federal revenue would decrease if Congress permanently repealed all
federal death taxes. By using static rather than dynamic scoring
and by making assumptions about how federal income and gift tax
payments would interact, the JCT significantly increased the "cost"
of repeal, thus forcing congressional tax writers to create this
on-again, off-again tax policy.
When President Bush signs legislation
eliminating this peculiar hiatus and making death tax repeal
permanent, taxpayers will likely do two things:
- Cease economically wasteful federal estate
- Focus more on running their businesses and
personal affairs knowing for certain that they do not have to look
over their shoulder for the death tax collector.
Good tax policy is known for its certainty, if
for no other characteristic. Without predictability, tax policy can
create confusion and have a lethal effect on economic activity.
Problems With the Death Tax
The number of threats posed to economic activity, by the death
tax, will be eliminated with the passage of H.R. 8.
The death tax hinders economic activity in the
- Discourages savings and investment;
- Undermines job creation and wage growth;
- Prevents economy from achieving investment
- Contradicts central promise of American life:
Discourages savings and investment. For
those Americans who think that their estates may one day pay
federal death taxes, the tax sends a signal that it's better to
consume today than invest and make more money in the future.
Instead of putting their money in the hands of entrepreneurs or
investing more in their own economic endeavors, the unmistakable
message of federal estate taxes is to consume it now, not pay it
Undermines job creation and wage
growth. Not only does this message have a corrosive effect on
the virtue of savings and prudent investment, but also it directly
undermines job creation and wage growth; and these latter effects
make death tax repeal everyone's concern. Heritage Foundation
economists estimate that the federal estate tax alone is
responsible for the loss of between 170,000 and 250,000 potential
jobs each year. This additional employment never appears in the
U.S. economy because the investments that would have resulted in
higher employment are not made.
Prevents economy from achieving investment
potential. Further, the effect of the estate tax on preventing
the economy from achieving its investment potential holds down wage
growth. Workers are more productive when they have new tools,
machines, and factories; and increased productivity boosts wages
and salaries. It is through productivity growth that enhancements
to economic and social well-being are and the virtues of our form
of economic organization are most abundantly seen.
Contradicts central promise of American
life: wealth creation. Indeed, the support for permanent repeal
of federal death taxes stems generally from the appreciation of
this last feature of our economy. Most Americans oppose death taxes
because they seem so un-American. The death tax appears to many
people as a clear contradiction to a central promise of American
life: that if you work hard, save, and live prudently, you will be
assured the enjoyment of your economically virtuous life. There are
few other places on the planet where this promise is made (let
alone kept), and it along with companion promises of political and
religious freedom has attracted millions of immigrants to the
Death taxes eat away at this promise. Some
Americans, like farmers, ranchers, homeowners, face the threat of
death taxes because they have improved the land upon which their
other assets sit or because factors beyond their control, like the
population growth of cities, drive up the price of their property.
Many Americans save in their businesses in order to pass an asset
along to their children; and, for millions of African-Americans and
others for whom the economy is not always benign, the threat of
seeing their life savings absorbed in a single tax bill is reason
enough to demand permanent repeal.
Still others are just starting out or, like
many women, returning to the labor force after raising families or
taking care of other obligations. There before them is an economy
that welcomes their enterprise and creativity, that promises a
living in exchange for meeting the needs of people in their
community. Small businesses offer a way around the corporate glass
ceiling, and the language barriers that immigrants face in larger
organizations are seldom-insurmountable obstacles in a business you
the Federal Death Tax
fresh and progressive as this economic picture appears, at the end
of a life of economic struggle still stands the nightmare of the
American dream. Without swift and decisive action by Congress, the
death tax withers over the next decade but does not die. The
uncertainty in tax planning will grow, the economy will
consistently under perform, and the hypocrisy of the economic
promise of American life will reverberate louder than ever. Now is
the time to bring this sorry chapter in U.S. tax policy to a
W. Beach is Director of the Center for Data
Analysis at The Heritage Foundation.