Policy Debate: Should the
Death Tax Be Abolished?
Issues and Background
I think it's so irritating that once I die, 55 percent of
my money goes to the United States government . . . You know why that's
so irritating? Because you already have paid nearly 50 percent.... when
you leave like a house or you leave money to people, then they're taxed
55 percent, so you've got to leave them enough so that once they're taxed,
they still have some money.... That's why you always hear about people
where their aunts left them houses or left them stuff and they can't keep
the house because the taxes are so much.
~Oprah Winfrey, August 4, 1997
. . . In this world, nothing is certain but death and taxes.
~Benjamin
Franklin
The federal estate tax, less formally known as the "death tax," was introduced
in 1916 to help provide revenue to support military expenditures during
World War I. Similar estate taxes had been introduced for short periods
of time in 1797, 1862, and 1898 to fund military buildups or wars. Under
the Economic
Growth and Taxpayer Relief Reconciliation Act of 2001 (signed on June
7, 2001), the estate tax will be phased out over a 10-year interval. This repeal,
however, is temporary and the estate tax will be reinstated in 2011 unless
further legislation is passed to extend the terms of this act. In the spring of 2005, the House passed
such legislation. On June 8, 2006, the Senate voted against a permanent appeal of the
estate tax.
While the federal estate tax was originally introduced to provide a
source of wartime revenue, it had been kept primarily as a means of redistributing
wealth. While economic efficiency may require that individuals be rewarded
for high productivity, successful innovation, and risk-taking, it is less
clear that their grandchildren, great-grandchildren, and subsequent generations
must share in this reward. One of the basic equity issues is whether some
individuals should receive larger and higher quality investments in education
simply because they were born into a wealthy family. A tax on large inheritances
is expected to reduce the extent of wealth inequality across U.S. households.
Opponents of the death tax, though, argue that an efficiency cost is
associated with this attempt to provide greater equity. A high death tax
alters incentives to acquire wealth for bequest purposes. The direction
of this effect, however, is not obvious. Since a higher tax rate raises
the cost of providing a bequest of a given size, it may be expected to
result in a reduction in the size of bequests. An altruistic parent, however,
who plans to leave a given amount of wealth for his or her children will
now have to set aside more funds to meet this goal (as observed by Oprah
Winfrey in the quote at the top of this page). Thus, it is not clear whether
this tax will reduce or increase the incentive to save (this possibility
seems to have been ignored in many of the commentaries appearing in the
links below). This is a question that can only be resolved through empirical
evidence.
The most damning evidence against the death tax is provided by a December
1998 Joint Economic Committee study that indicates that the cost of complying
with and collecting the tax exceeds the amount of tax revenue generated.
Critics of the tax also note that the very wealthiest individuals can afford
to hire lawyers, tax consultants, and estate planners who provide assistance
in finding legal means of avoiding estate taxes on inherited wealth.
Another argument against the death tax is that the wealth that is inherited
is derived from income that had already been taxed when it was received.
Opponents of this tax argue that it is unfair to tax this income twice.
Critics also note that the tax rate on large estates in the U.S. is substantially
above that of other countries.
Since the death tax is frequently imposed on nonliquid assets, meeting
the tax liability sometimes required the sale of these assets. This may lead to
the sale of a family business to meet tax liability. If a family meets
the tax liability by borrowing money, this adds to the debt burden of the
business at a time when it is already having to deal with the loss of the
previous owner. A business failure may become more likely in such a situation.
In either case, family-owned businesses may have to be liquidated as a
result of the death tax.
Primary Resources and Data
- Internal Revenue Service
http://www.irs.gov/
The Internal Revenue Service web site provides an extensive collection
of detailed information on the estate tax that exists under current law.
Some of the most relevant information may be found on their pages on:
- Economic Growth and Taxpayer Relief Act of 2001
http://www.theorator.com/bills107/hr3.html
The Economic Growth and Taxpayer Relief Act of 2001 phases out the estate tax over a 10-year period. This
page contains the text of this Act.
- American Council for Capital Formation Center for Policy Research,
"An International Comparison of Death Tax Rates"
http://www.accf.org/publications/reports/sr-intcomp-deathtax.html
This online document, provided by the American Council for Capital Formation
Center for Policy Research, contains a listing of the highest marginal
estate tax rates for 24 countries. The document notes that the average
maximum death tax rate is 21.6% for these countries. Of the 24 countries
surveyed, only Japan (with a maximum marginal death tax rate of 70%) has
a maximum marginal rate that exceeds the 55% maximum marginal death tax
rate in the U.S.
- Findlaw, "Estate and Gift Tax FAQ"
http://print.estate.findlaw.com/estate-planning/estate-planning-taxes/estate-planning-taxes-faq.html
This online document describes the status of Federal and state death taxes under current
law. It
is noted that many states have eliminated or reduced the level of death
taxes in recent years.
-
Isabel V. Sawhill and Daniel P. McMurrer, "Are Justice and Inequality
Compatible?"
http://www.urban.org/url.cfm?ID=306774&renderforprint=1&CFID=393856&CFTOKEN=11202727
In this online Urban Institute article, Isabel V. Sawhill and Daniel
P. McMurrer note that income is more unequally distributed in the U.S.
than in other advanced economies and that this distribution has become
more unequal over the past 25 years. To examine the consequences of this,
Sawhill and McMurrer examine alternative views of distributive justice.
They discuss some of the practical problems in devising a generally accepted
notion of justice. These problems include the equity-efficiency tradeoff,
the nature-nurture debate, and the extent of income mobility over time
and across generations.
-
Stanford Encyclopedia of Philosophy, "Original Position"
http://plato.stanford.edu/entries/original-position/
This page discusses the theory of justice suggested by John Rawls.
He suggests that an economic and political system should be considered
to be fair if everyone would have found it acceptable if they had to evaluate
it without knowing what position they would occupy. From this premise,
Rawls derives several basic principles of justice. Rawls argues that a
redistribution of wealth is desirable to redress inequalities caused by
the "natural lottery" of birth.
Different Perspectives in the Debate
- 60 Plus Association, "Kill the Death Tax & Save Social Security"
http://www.60plus.org/deathtax.asp
This site is provided by a seniors advocacy group that is opposed to the
death tax. Their web site contains articles and news items associated
with the death tax.
- Paul S. Speranza, "Statement Before the House Committee on
Ways and Means"
http://waysandmeans.house.gov/legacy.asp?file=legacy/fullcomm/106cong/6-16-99/6-16sper.htm
Paul S. Speranza, the Chair of the Tax Committee of the Greater Rochester
New York Metro Chamber of Commerce, provides a history of the federal
estate and gift tax and a series of arguments for the elimination of this
tax. He argues that this tax encourages individuals to engage in inefficient
activities that are designed for the primary purpose of escaping these
taxes. Speranza suggests that billions of dollars are used for estate
tax planning and compliance (an amount approximately equal to the amount
of tax collected). While wealthier households engage in strategies to
evade this tax, smaller family-owned businesses are less likely to be
aware of such methods. He argues that this threatens the viability of
many family-owned businesses.
- William W. Beach, "A Scorecard on Death Tax Reform"
http://www.heritage.org/Research/Taxes/BG1197a.cfm
William W. Beach argues against the death tax in this June 25, 1998 Heritage
Foundation Backgrounder. He suggests that the death tax imposes a
burden on "minority and female business owners, farmers, the self-employed,
and -- indirectly but just as importantly -- blue-collar workers...."
Beach notes that the most wealthy households are able to avoid estate
taxes by hiring expensive lawyers and estate planners. He suggests that
this makes the estate tax somewhat regressive (for those in the upper-portion
of the wealth distribution). Beach also believes that death taxes hurt
small businesses, undermine savings, and appear to be the most expensive
tax to pay and collect. As part of his discussion, Beach provides a good
overview of the changes introduced by the Taxpayer's Relief Act of 1997.
He argues that this act did not go far enough and suggests that the death
tax should be eliminated.
- Joint Economic Committee, "The Economics of the Estate Tax"
http://www.house.gov/jec/fiscal/tx-grwth/estattax/estattax.htm
In this December 1998 study, the Joint Economic Committee suggests that
the estate tax has had an adverse effect on capital accumulation and growth,
encourages an inefficient allocation of resources, leads to the dissolution
of thousands of family-run businesses, endangers the environment, and
is "complicated, unfair and inefficient." This study also suggests that
the tax does not reduce inequality, has compliance costs that are approximately
equal to the revenue collected, and raises little net revenue for the
federal government. The abolition of the estate tax is recommended.
- National Center for Policy Analysis, "Savings & Investment,
Estate Tax and Other Tax Breaks"
http://www.ncpa.org/pi/taxes/tax63.html
The National Center for Policy Analysis provides a reasonably extensive
collection of links to online documents that suggest that estate taxes
provide adverse economic effects.
Gary Robbins and Aldona Robbins, "The Case for Burying the
Estate Tax"
http://www.ipi.org/ipi/IPIPublications.nsf...
Gary and Aldona Robbins provide a case against the federal estate tax
in this online Institute for Policy Innovation document. They argue
that the federal estate tax provides a small amount of tax revenue while
doing substantial harm. The authors suggest that the costs of collecting
and complying with this law is close to the amount of revenue raised by
the tax. Further, they suggest that the tax forces families to sell family
businesses, reduces the incentive to save and invest, and is not paid
by those who possess the largest estates. (To view this document, the Adobe Acrobat viewer plugin is required.
You may download this viewer by clicking here.)
- The Center for the Study of Taxation, "Myths and Public Perception"
http://www.center4studytax.com/html/myths.html
The Center for the Study of Taxation provides several arguments against
the estate tax on this page. Survey results concerning the public perception
of the desirability of estate taxes are also provided.
- Deathtax.com
http://www.deathtax.com/
This web site provides a collection of online documents and statistics
that suggest that the death tax should be abolished. A FAQ and links to
the sites of other organizations that oppose the death tax are also provided.
- Edward J. McCaffery, "Grave Robbers: The Moral Case against
the Death Tax"
http://www.cato.org/pubs/pas/pa353.pdf
Edward J. McCaffery argues against the death tax in this October 4, 1999
Cato Policy Analysis article. He argues that the tax generates
little revenue, results in economic inefficiency, reduces growth, and
has collection and compliance costs that are approximately equal to the
tax revenue generated. McCaffery also suggests that this tax "discourages
economically and socially beneficial intergenerational saving." He suggests
that it be replaced by a more efficient and equitable progressive consumption
tax. (To view this document, the Adobe Acrobat viewer plugin is required.
You may download this viewer by clicking here.)
- Martin and Kathleen Feldstein, "Estate Tax Repeal Makes Sense"
http://www.nber.org/feldstein/bg022701.html
In this February 27, 2001 Boston Globe editorial, Martin and Kathleen Feldstein provide an economic case
against the estate tax. They argue that this tax generates little revenue while imposing a strong saving disincentive
effect. Studies are cited that indicate that the estate tax may also reduce labor supply incentives.
- Bernard Wasow, "Six Myths about the Estate Tax"
http://www.tcf.org/Publications/EconomicsInequality/sixtaxmyths.pdf
In this February 2001 article, Bernard Wasow argues in favor of the continuation of the Estate Tax. He states that the
estate tax affects a very small proportion of households. Wasow suggests that there is no credible empirical evidence that indicates
that the estate tax would reduce incentives to save or invest. (To view this document, the Adobe Acrobat viewer plugin is required.
You may download this viewer by clicking here.)
- President Bill Clinton, "Maintaining Our Fiscal Discipline by Vetoing One in a Series of GOP
Tax Breaks that Would Bring America Back into Deficits"
http://clinton6.nara.gov/2000/08/2000-08-31-fact-sheet-on-maintaining-our-fiscal-discipline.html
This veto message explains President Clinton's reasons for vetoing
a bill to repeal the estate tax. The memorandum argues that
this proposal benefits only a small proportion of households.
Clinton suggests that reducing estate taxes (and other taxes) would reduce
the social security surplus, raise interest rates, and hinder economic
growth. The document also argues that the long-run effect of this tax
cut plan would become more severe as the baby-boom generation reaches
retirement age.
- Office of Management and Budget, "H.R. 8 - Death Tax Elimination Act of 2000"
http://clinton3.nara.gov/OMB/legislative/sap/HR8-r.html
This July 11, 2000 statement, provided by the Office of Management and Budget, contains a list of
reasons for President Clinton's planned veto of the Death Tax Elimination Act of 2000. It is argued
that the elimination of the death tax is inconsistent with the priorities of reducing the national
debt, preserving Medicare and Social Security, and enhancing human capital investment. This statement
also notes that only the wealthiest 2% of the population are subject to the estate tax.
- Office of Management and Budget, "H.R. 8 - Death Tax Elimination Act of 2001"
http://www.whitehouse.gov/omb/legislative/sap/107-1/HR8-h.html
This April 4, 2001 statement, provided by the Office of Management and Budget, discusses President Bush's support for the
elimination of the Death Tax.
- Quotegarden.com, "Tax Quotes"
http://www.quotegarden.com/taxes.html
This site provides a collection of dozens of humorous tax quotes.
- Joel Friedman and Andrew Lee, "Permanent Repeal of the Estate Tax Would Be Costly, Yet Would Benefit Only a Few, Very Large Estates"
http://www.cbpp.org/6-17-03tax.htm
Joel Friedman and Andrew Lee, in this online June 17, 2003 Center on Budget and Policy Priorities document,
discuss the adverse fiscal effects that would result from a permanent repeal of the estate tax.
They note that a permanent repeal is expected to result in the loss of approximately $64 billion in federal revenue
in 2013. It is argued that the loss of this revenue when the baby boom generation is retiring in large numbers will
cause help aggravate the problems facing Social Security. Friedman and Lee note that, as compared to complete repeal,
estate tax reform that maintains an exemption of $3.5 million and a tax rate of 45% would pay for approximately 25% of
the projected Social Security shortfall.
- Wojciech Kopczuk and Joel Slemrod, "Dying to Save Taxes: Evidence from Estate Tax Returns on the Death Elasticity"
http://papers.nber.org/papers/w8158.pdf
Wojciech Kopczuk and Joel Slemrod, in this March 2001 working paper, examine the impact of changes in estate tax treatment
on death rates. They report evidence suggesting that some deaths appear to have been postponed to provide more favorable
tax treatment on estates. Kopczuk and Slemrod note that other studies have found that deaths often appear to be postponed until
holidays or other special events. (To view this document, the Adobe Acrobat viewer plugin is required.
You may download this viewer by clicking here.)
- William Gale and Joel Slemrod, "Rhetoric and Economics in the Estate Tax Debate"
http://www.brookings.edu/views/papers/gale/20010522.pdf
William Gale and Joel Slemrod examine the positive and normative economic issues assocated
with the estate tax in this May 2001 working paper. They argue that many claims made by each side of the debate
are incorrect.
(To view this document, the Adobe Acrobat viewer plugin is required.
You may download this viewer by clicking here.)
- Bill Gates, Sr. and Chuck Collins, "Long Live the Estate Tax!"
http://www.thenation.com/doc/20030127/gates
Bill Gates, Sr. and Chuck Collins argue in support of the estate tax in this January 9, 2003 Nation article.
They argue that the estate tax affects only a small proportion of households, but its elimination
would result in a substantial loss in federal and state revenue.
- Diane Lim Rogers, "'Death Tax' Repeal Unfair to Those Who Owe 'Birth Tax'"
http://www.brookings.edu/views/op-ed/20060531rogers.htm
Diane Lim Rogers argues against the permanent repeal of the estate tax in this May 31, 2006 editorial
appearing in the San Francisco Chronicle. She notes that the estate tax affects a very small
proportion of very wealthy households, yet its permanent elimination will result in a substantially
larger budget deficit at a time of growing social security shortfalls. Rogers argues that the
elimination of this tax would increase the expected tax burden on future generations of citizens.
Since alternative taxes are likely to induce greater economic distortions, she believes that it is
more efficient to maintain the estate tax.
- FarEstateTax.org
http://www.ombwatch.org/estatetax/
This website provides arguments for the continuation of the estate tax.
- Senator Edward M. Kennedy, "Statement by Senator Edward M. Kennedy on the Defeat of the Estate Tax Proposal"
http://kennedy.senate.gov/newsroom/press_release...9B165793D
Senator Edward M. Kennedy argues against the continuation of the estate tax repeal in this June 8,
2006 statement. He argues that the estate tax only benefits the weaithiest of households. Kennedy
notes that the revenue received from the estate tax would cover 25% of the projected social security
shortfall.
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