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The Estate Tax and the American Dream

George Connolly, Ray Brincks, and Helen Wisotsky are just a few examples of the impact of the estate tax on the American dream. The facts provided below explain why the estate tax has economic implications for all Americans.

What is the Estate Tax?

The estate tax is a tax applied to a person's total assets, or estate, that they leave behind at death. The federal estate tax is a tax of 45% applied to all assets in excess of $3.5 million.¹ It is defined by the Internal Revenue Service as "a tax on your right to transfer property at your death."²

The estate tax is imposed on any and all assets. This includes homes, cars, furniture, business property and machinery, investments and savings.

The estate tax is paid by the recipients of an inheritance – most often family heirs – and is due within 9 months of death. If the heirs do not have sufficient cash with which to pay, personal property and business assets must be sold to pay the tax.

History of the Estate Tax

The estate tax was enacted three times in American history, only to be repealed subsequently thereafter. The first estate tax was repealed by Thomas Jefferson, who forcefully defended a person's right to leave one's property at death to "whom he pleases."³

In 1862 it was imposed a second time to collect funds for the Civil War, and was repealed in 1870. In 1898 it was imposed again to collect funds for the Spanish-American war, and was repealed in 1902. ⁴

The estate tax was enacted a fourth time, in 1916 to help pay for military involvement in WWI. The estate tax rate in 1916 was 10 percent. World War I ended ninety years ago, but Congress forgot to repeal the estate tax, and today the estate tax remains at the rate of 45 percent.

Current Legislative Status of the Estate Tax

In 2001, Congress passed temporary estate tax repeal through the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). EGTRRA reduced the estate tax from 55% in 2001 to 45% in 2009 and schedules the Death Tax for repeal in 2010. However, due to complex Senate budget rules, the EGTRRA tax relief is not permanent.

In 2011, all of the EGTRRA tax relief "expires" and the affected tax rates return to their prior levels. Consequently, the estate tax will return to the rate of 55% in 2011 if Congress does not pass legislation to make the repeal permanent or otherwise change the law.

Seven Key Facts about the Estate Tax

Fact 1: Repealing the estate tax creates 1.5 million jobs

Dr. Douglass Holtz-Eakin, former director of the Congressional Budget Office, estimates that the estate tax's confiscation of capital causes so much economic distortion that repeal would spur the creation of roughly 1.5 million jobs.⁵ This is a big number, but it is not much of a surprise when you take into account the full economic burden of the estate tax.

Fact 2: The estate tax hits tens of thousands of family businesses and farms

According to the Joint Economic Committee, over the course of 10 years the estate tax was paid by roughly 37,000 "closely-held businesses," 24,000 family farms, 50,000 limited-partnerships and nearly 28,000 "other" non-corporate businesses, such as sole proprietorships.⁶

Family businesses are particularly vulnerable to the loss of capital because the majority of the company's capital is held in its "hard assets": the property, machinery, vehicles, buildings, inventory, livestock, and crops.

Fact 3: The estate tax imposes a disproportionate burden on entrepreneurs

Entrepreneurs face an expected Estate Tax liability that is typically nearly five times as large as non-entrepreneurs.⁷

Fact 4: The estate tax slows America's economy by over $100 billion annually

The estate tax lowers GDP by $119 billion and labor income by $79 billion, according to a study by economist Steve Entin.⁸

Fact 5: The estate tax reduces overall capital in the economy by over $800 billion

Over the course of ten years, the Estate Tax has cost the economy $847 billion in capital stock, according to the Congressional Joint Economic Committee. Since capital investment is a prerequisite for economic growth, the loss of such capital reduces economic output, retarding business growth and job creation.⁹

One of the primary reasons for the estate tax's uniquely heavy burden is its high "compliance costs." Compliance costs are the tax-planning fees and misallocation of funds caused by paying the estate tax. Research from President Clinton's economic adviser, Alicia Munnell, shows that the estate tax imposes compliance costs that are possibly "the highest of all taxes."¹⁰

Fact 6: The Estate Tax Fails its Job: Providing Tax Revenues

In no year since 1995 has the Estate Tax produced more than 1.3 percent of total federal tax revenue – in many years producing only 1 percent of total revenues. The income tax, by comparison, generates more than 50 times the amount.¹¹

Research indicates that the estate tax may actually cost the government more than it is worth to collect, as every dollar it raises comes at the cost of economic growth and other tax revenues (such as capital gains and income taxes).

Economist Steve Entin has documented that while ending the Estate Tax altogether would appear to "cost" the Treasury $19.2 billion, the increased business activity as a result of repeal would spur a net increase in annual tax revenues of approximately $23.3 billion.¹²

Fact 7: The Life-Insurance Industry Makes Billions thanks to the Estate Tax

The life-insurance industry made an estimated $12 billion in 2005 on second to die life insurance policies. These policies are specifically designed to minimize the impact of the estate tax on family business owners and farmers. Hence, it should come as little surprise in 2009, the fight for a permanent estate tax remains a top priority for the life-insurance industry's $18 million lobbying arm.¹³

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