The U.S. House of Representatives is once again poised to vote on repealing the federal death tax. In view of the strong support that death tax repeal receives from the general public, the House debate should be firmly grounded in what an increasingly large percentage of voters already know: Death taxes adversely affect many times the number of people who pay the tax collector. The Death Tax Elimination Act (H.R. 8), sponsored by Representatives Jennifer Dunn (R-WA) and John Tanner (D-TN), is a response to this growing understanding and offers the House its second opportunity in as many years to eliminate this onerous tax.
Death taxes most often burden the very people that tax policy is intended to help. For example:
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Women and minorities are very often owners of small and medium-sized businesses. After sacrificing daily to build their businesses by reinvesting their profits, they soon realize that the financial legacy of their hard work, which they hoped to pass on to their children, instead will fall victim to confiscatory taxation and liquidation.
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Farmers often face losing their farms, but this is not so much because of competition from wealthy agribusinesses or capitalist "robber barons." More often, it is because the federal government heavily taxes the estates of people who invested most of their earnings back into their farms and had only meager liquid savings.
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Workers suffer when they lose their jobs because many small and medium-sized businesses are liquidated to pay death taxes and because high capital costs depress the number of new businesses that could offer them a job.
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Low-income people are harmed--not only because the general economy is weakened by the death tax's rapacious appetite for family-owned businesses, but also because the death tax discourages savings by encouraging consumption.
Death taxes hurt small
businesses.
Investing in a business is one of the many ways to save for the
future. For most small firms, every available dollar goes into the
business--the dry cleaning firm, the restaurant, the trucking
company--to ensure that it sustains an income for the owner's
family and is an asset to pass on to children. Women with children
often find self-employment to be the only entry-level work
available. Minorities, many of whom wish to raise their families in
ethnic communities, understand well the virtues and promises of
self-employment. Yet the financial security that family-owned and
small businesses provide these Americans is put at risk if the
owner dies with a taxable estate.
In an important 1995 study of how minority business owners perceive the estate tax, Joseph Astrachan and Craig Aronoff, economists at Kennesaw State University in Georgia, found that:
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Some 90 percent of the surveyed minority businesses know they might be subject to the federal estate tax;
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Although 67 percent of these businesses have taken steps (gifts of stock, restructuring ownership, purchasing life insurance, and buy-sell agreements) to shelter their assets from estate taxes, over 50 percent of them indicate that they would not have taken these steps had there been no estate tax; and
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Some 58 percent of all respondents in the survey anticipate business failure or great difficulty maintaining the business after their death.
Death taxes are more "affordable" as
income rises.
Taxpayers who cannot pay tax-planning fees frequently lose more
of their estates to death taxes. Thus, what appears to be a
progressive tax contains a regressive dimension. Experts on the
death tax continually are struck by the number of taxpayers who are
insufficiently prepared to pay the death tax and by the high
correlation of these types of people with those who have not had
the benefit of high-priced legal and accounting advice. Indeed,
legal avoidance of high death tax liabilities is closely related to
the amount of fees taxpayers are able to pay for expensive
tax-planning advice.
Death taxes undermine savings and
investment.
Not only do death taxes reduce potential employment opportunities
and undermine the promise that hard, honest labor will be rewarded,
but they also encourage consumption and undermine savings. What can
be said generally about income taxes can be stated emphatically
about death taxes: Accumulation of more wealth will lead to more
taxes, while consumption of income will result in relatively
lighter taxation. In other words, it makes more tax-planning sense
to buy vacations in Colorado or a painting by Rubens than to invest
in new production equipment or expand a business.
Death taxes are costly to
collect.
The economic effects of the disincentive to save and invest are
striking, especially in light of the relatively small amount of
federal revenue raised by death taxes. A 1996 Heritage Foundation
analysis of death taxes using the WEFA Group U.S. Macroeconomic
Model and the Washington University Macro Model, for example, found
that, if the estate tax had been repealed in 1996, then over the
next nine years:
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The U.S. economy would average as much as $11 billion per year in extra output;
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Personal income could rise by an average of $8 billion per year above current projections; and
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The extra tax revenue generated by extra growth would more than compensate for the meager revenue losses stemming from the repeal.
The death tax is not even a good value
for the government.
Federal death taxes probably are the most expensive taxes to
pay and collect. Death taxes raise just slightly more than 1
percent of total federal revenues, but according to one 1994
analysis, total compliance costs (including economic disincentives)
amount to about 65 cents for every dollar collected. Other studies,
which subtract disincentives and examine only direct outlays by
taxpayers to comply with estate tax law, put the compliance cost at
about 31 cents per dollar. This additional cost means that the
$27.8 billion collected in federal death taxes last year actually
cost taxpayers $36.4 billion.
William W. Beach is John M. Olin Senior Fellow in Economics and Director of the Center for Data Analysis at The Heritage Foundation.
