Congress is set to unveil more details of its tax reform proposal this week, and many people fear that the death tax—also known as the estate tax and related gift taxes—will not be fully repealed.
Not repealing the death tax would literally be economic malpractice. The tax is a burden on family-owned businesses, slows economic growth, and contributes to large compliance burdens. It’s a costly burden that families often plan around.
Politically, repeal of the death tax is even more of a no-brainer. No one likes the death tax. Killing it enjoys bipartisan support.
The death tax is a 40 percent tax on the assets that one leaves behind after death above $5.45 million. It is intended to prevent the accumulation of wealth across generations.
Unfortunately, the tax has the unintended consequence of stifling economic growth.
The largest estates are often those that include family-owned businesses. Family businesses appear valuable on paper, but it’s hard to pay a 40 percent tax on the value of your farm equipment without selling it or taking out a huge loan.
You may have heard that less than 5,000 people pay the estate tax each year, so proponents of the tax will claim it has no measurable effect on businesses or the economy.
What proponents fail to recognize is that the tax incentivizes business owners to close or sell their companies before they die, spending down their investments rather than working to maintain their business for future generations.
This practice hurts the economy because family-owned businesses are often hard to transfer to unrelated third parties. Forcing this transfer results in less business investment, which is ultimately what will create jobs, raise wages, and grow the economy.
In fact, a Heritage Foundation study estimated that eliminating the death tax would result in an average of 18,000 private-sector jobs annually and would boost U.S. economic growth by more than $46 billion over 10 years due to increased investment.
Perhaps most perversely, however, the tax falls most heavily on those businesses and individuals who do not hire professional estate planners to minimize or entirely escape the tax.
The National Taxpayers Union estimates the death tax requires nearly 2.1 million hours of compliance time a year, which costs over $100 million, resulting in costs of nearly $10,000 per filer.
For an annual cost of billions of dollars of forgone economic output and millions of dollars of direct compliance costs, what are the purported benefits that people claim?
Naively, some people may believe that the death tax can help to address income inequality. Although income inequality has been shown not to impede opportunity, only a minuscule fraction (around 2 percent) of such inequality can even be attributed to inherited wealth in the first place. As a result, even if we taxed every penny of every estate, the tax would have little impact.
Other proponents hail the supposed revenue the death tax brings into Washington’s coffers. In reality, though, it accounts for less than 1 percent of all federal revenues.
According to the Tax Foundation, repealing the tax would only cost the federal government $19 billion over 10 years when taking into account the economic growth that would result. However, even this dynamic estimate still overstates the revenue loss because taxpayers currently give assets to relatives in lower-income tax brackets to avoid the tax.
Removing the estate tax could actually bring in more revenue if assets are not shifted to relatives prematurely and thus taxed at the higher-income bracket of the estate owner.
Despite the economic damage wrought by the estate tax, there is a more compelling reason for Congress to repeal it: The estate tax is redundant.
The estate tax is a second and often third layer of tax on income that is already subject to federal taxes. This last layer of tax is foisted on families at their most vulnerable time—when they have lost a loved one.
An American’s death should not be a taxable event.
As part of tax reform, Washington lawmakers would do well to kill the death tax immediately.
Kevin D. Dayaratna specializes in tax, energy and health policy issues as senior statistician and research programmer in The Heritage Foundation's Center for Data Analysis.
Adam Michel focuses on tax policy and the federal budget as a policy analyst in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
Editor's Note: This piece was originally published by The Daily Signal.