An updated study released today on the impacts of the federal estate tax shows that it generates more harm than good for the U.S. economy and federal tax coffers.
In a study titled "Cost & Consequences of the Federal Estate Tax," economists on the Republican staff of the Joint Economic Committee point out the "Death Tax," as some label it, has robbed almost as much capital stock from the U.S. economy as this tax has generated in revenue in its 96 years of existence. The total revenue produced by this tax in almost a century is only $1.2 trillion, which would barely cover the federal deficit during this budget year.
Rather than redistribute wealth in America as its supporters hope, the analysis shows the opposite: the estate tax motivates wealth holders to reduce savings and increase spending now rather than pass it to the next generation -- which actually increases the consumption gap between the wealthy and the poor in America.
"By every measure this tax has failed to achieve the misguided goals Congress initially set for it when it established it nearly a century ago," says U.S. Congressman Kevin Brady of Texas, Vice Chairman and top Republican on the Joint Economic Committee. "It fails to generate sufficient revenue; it fails to redistribute income or boost the economy, and it fails to meet any basic standard of fairness."
"The bottom line is that both our economy and federal tax revenues would grow faster if the death tax were simply abolished. "
A majority of members of the U.S. House -- 218 - are co-sponsoring legislation (HR 1259) by Brady to abolish the federal estate tax. Senator John Thune (R-SD) leads the effort in the other chamber.
According to a study by Stephen J. Entin, former deputy assistant secretary for economic policy at the Treasury Department, repealing the estate tax would increase federal revenue $89 billion through 2021 over the current estate tax revenue through increased income taxes and economic output.
The JEC study, released today, found that:
The estate tax impedes economic growth because it discourages savings and capital accumulation.
As of 2008, the estate tax has cumulatively reduced the amount of capital stock (buildings, equipment and software) in the U.S. economy by roughly $1.1 trillion since its introduction as a permanent tax in 1916, equivalent to 3.2 percent of the total capital stock.
The estate tax is an overwhelming cause of the dissolution of family businesses. The estate tax is a significant hindrance to entrepreneurial activity because many family businesses lack sufficient liquid assets to pay estate tax liabilities.
The estate tax does not reduce income and wealth inequality. Perversely, the estate tax creates a barrier to income and wealth mobility.
Economic inefficiencies due to the distortionary effects of the estate tax are burdensome, and the costs of compliance associated with the estate tax add to the paperwork and time necessary to comply with other taxes.
The estate tax raises a negligible amount of revenue. Since its inception nearly 100 years ago, the estate tax has raised just under $1.3 trillion in total revenue; by comparison, that is equivalent to the U.S. federal deficit for fiscal year 2011 alone.
Many studies have indicated that abolition of the estate tax would actually increase overall federal tax revenue in at least two ways: (1) the estate tax robs additional federal tax revenues from the collection of other taxes like the income tax, and (2) a larger total capital stock could increase income tax revenue.
This study confirms that the cost of the estate tax far exceeds any benefits it produces. This study, developed by the Republican staff of the Joint Economic Committee, is the second update the JEC Republican staff has done of its initial study in 1998. Read more on the study here and here.
Listen to the July 25 News Conference with Sen. Thune, Rep. Nunes, farmers and ranchers from across the country, a tax reform advocate and a small business people here.