By Andrew Wilford
With the release of the House’s tax reform legislation containing a phased-out repeal of the estate tax, Congress is finally taking a historic step toward eliminating one of the most unpopular, ineffective and inefficient provisions in the tax code. The elimination of the estate tax is a laudable goal for policymakers, and they should see repeal through to its completion by shortening the phase-out period as much as possible. The main reason to repeal the estate tax is to eliminate the distortive effect that it has on the economy. With the estate tax in place, Americans with large estates are incentivized to spend money to avoid a hefty tax. Given that saving and investing are actions which are crucial to long-term economic growth, tax policy which expressly discourages these activities is poorly targeted. Yet, there are plenty of other reasons to get rid of the estate tax as well. Not all Americans with larger estates avoid the death tax by spending their money — many accountants spend lots of time and are paid huge sums of money to avoid the tax. A recent study by the National Taxpayers Union Foundation found that the value of time spent complying with estate tax is approximately $10,000per filer. Accountants spend nearly 2.1 million hours preparing estate tax returns. These compliance burdens contribute nothing to the economy, representing a deadweight loss.
There is also remarkable inefficiency associated with the estate tax. Though everyone who filed an estate tax and trust return had to handle the significant compliance burden of filling out the return, a mere 27 percent of these filers actually ended up having any tax liability. The estate tax also discourages entrepreneurship. Family-owned businesses and startups risk their heirs being hit with a substantial tax bill should the owner suddenly die. This is one reason that family-owned businesses are at the greatest risk of being forced into being sold just to pay the tax to inherit the business. A substantial number of respondents in a recent survey of business owners said that worrying about the estate tax restricts their ability to grow their business. In general, the economic costs of the estate tax are significant and affect all Americans. One study estimates that estate tax repeal would create 18,000 jobs annually and increase economic growth by $46 billion over 10 years. Discouraging investment and entrepreneurship hurts Americans at every income level.
The estate tax is also in conflict with what most Americans consider to be fair taxation. Death should not be a taxable event, and Americans mourning a loved one should not be forced to confront a large tax bill that requires taking out loans or selling their family business. Such moral issues with this tax are a major reason why only 19 percent of Americans supported preserving the estate tax in a recent Gallup poll. Arguments made to advocate for preserving the estate tax fail to justify its costs. The revenue brought in by the estate tax is only $23.1 billion; not an insignificant amount, but less than one percent of government revenue. Kyle Pomerleau of the Tax Foundation points out that replacing the estate tax with a 2-percent increase in the top marginal tax rate would raise the same revenue while reducing compliance costs and negative economic impacts.
Some think of the estate tax as a method of preventing wealth from being passed down from generation to generation. However, a mere 2 percent of wealth inequality in the United States is attributable to inherited wealth —even a 100-percent tax on inheritance would have a negligible effect on wealth inequality. The estate tax is an economically harmful tax that a majority of Americans oppose. The House GOP should be applauded for finally taking action to end the taxation of dying. In 2001, the estate tax was repealed temporarily, but it returned a year after repeal. This time, Congress should ensure that estate tax is terminated for good.
Andrew Wilford is an associate policy analyst at the National Taxpayers Union Foundation. Follow him on Twitter @PolicyWilford.