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No section of the tax code is more unfair and more dangerous to our entrepreneurial economy than the death tax. With rates as high as 55 percent, the death tax punishes people who build a successful business or farm and try to leave that legacy to their kids. Moreover, the death tax’s modest contributions to the federal Treasury are dwarfed by its staggering impact on the U.S. economy.
Repealing the death tax is the right thing to do for American family farms, businesses, and the new economy
This week, lawmakers in the House of Representatives can bury this destructive tax when they debate H.R. 8, “The Death Tax Elimination Act,” sponsored by Rep. Jennifer Dunn (R-Wash), which would phase out the death tax over the next 10 years.
The reasons to terminate the death tax are simple:
The death tax is unfair. In 1996, 53 percent of the death tax returns were for estates valued below $1 million, and 96 percent of the returns were for estates valued below $5 million. These business owners are not the Rockefellers and Carnegies; they are our neighbors, community leaders, and role models.
The death tax is a tax on American values, a virtue tax, a tax on the American dream. Typically, the owners of small businesses and farms plow much of their profits back into the business. This means that, at the end of the day, their kids have inherited a business that is asset rich, but cash poor. According to Heritage Foundation economist William Beach, “investing in a business is one of the many forms of saving for the future, and it is the only form for some families. For most small firms, every available dollar goes into the family business – the dry cleaning business, the restaurant, the trucking company – because the business creates an income for the owners and an asset for their children. … The financial security that these family-owned and small businesses provide is put at risk if the owner dies with a taxable estate.”1
The death tax is anti-jobs and anti-entrepreneurship. The death tax is the leading cause of dissolution for most small businesses. One-third of small business owners today will have to sell or liquidate part of their business to pay estate taxes, and half of those who do liquidate will have to eliminate 30 or more jobs. Is it any wonder, then, that 70 percent of all businesses never make it past the first generation? Or, that 87 percent of all businesses do not make it to the third generation?2
Minority-owned firms are particularly hard hit by the death taxes. A Kennesaw State survey shows that 58 percent of minority businesses anticipate failure or problems when encountering death taxes. In addition, while 90 percent of these business owners know about these burdensome death taxes, only two-thirds of the survey respondents have been able to take precautionary steps to lessen their exposure to these taxes.3
The death tax collects only a small percentage of federal revenues. Indeed, this year the Congressional Budget Office projects that the death tax will collect roughly $30 billion this year, just 1.5 percent of total federal revenues. Surely, with as much as $1.8 trillion in non-Social Security surpluses being projected over the next 10 years, Washington can afford to return a penny on the dollar of federal tax revenues.
The compliance costs of the death tax actually cost the economy more than what it collects for the U.S. Treasury. Studies have found that the death tax’s compliance costs amount to more than 30 cents for every dollar collected. That means that for the $30 billion the tax will raise this year, the actual cost to taxpayers will be nearly $40 billion.
There’s a lot of people getting rich off of the death tax. One report found that at least 16,000 members of the American Bar Association cite trust, probate, and estate law as specialties.4
The death tax is anti-family. As the economist Alan Reynolds said, “we tax generosity within families … even as we encourage people to deduct gifts to strangers.”5 That doesn’t make sense does it?
Repealing the death tax would create new jobs and spur the U.S. economy. The non-partisan Tax Foundation has found that death taxes have “roughly the same effect on entrepreneurial incentives as a doubling of income tax rates. In other words, income tax rates would need to be nearly twice their current levels … to produce the same disincentive effects as the current estate tax.”6 And a study by George Mason University Professor Richard Wagner showed tremendous economic gains from eliminating death taxes, because repealing the death tax greatly reduces the cost of capital. In fact, Wagner’s study forecast that within eight years of repealing the death tax, the U.S. economy would produce $80 billion more in annual output, create 250,000 additional jobs, and increase the capital stock by $640 billion.7
The Death Tax is out of step with our new, investor-based economy. With nearly half of all American households now invested in the stock market, it is possible that millions of average families will soon retire with estates large enough to be hit by the death tax.
Repealing the death tax is the right thing to do for American family farms, businesses, and the new economy. It is also the right thing to do to protect American values at a minimal cost to the U.S. Treasury.
1 William W. Beach, “A Scorecard on Death Tax Reform,” Heritage Foundation Backgrounder #1197, June 25, 1998, p. 2.
2 National Federation of Independent Business, “Death (estate) tax reform.”
3 Joseph Astrachan and Craig Aronoff, A Report on the Impact of the Federal Estate Tax: A Study of Two Industry Groups, Family Enterprise Center of the Coles School of Business, Kennesaw State College, July 24, 1995.
4 Bruce Bartlett, “Why Death Taxes Should Be Abolished,” NCPA Policy Backgrounder #150 , August 18, 1999.
5 Alan Reynolds, “Death to Destructive Taxes – Good Economics,” The Wall Street Journal, May 1, 1997.
6 Patrick Fleenor and J.D. Foster, “An Analysis of the Disincentive Effects of the Estate Tax on Entrepreneurship,” Tax Foundation Background Paper #9, June 1, 1994.
7 Richard Wagner, Federal Transfer Taxation: A Study in Social Cost, The Center for the Study of Taxation, 1993.