Entrepreneurs and the Estate Tax

Abstract

This article analyzes the claims of a recent commentary by Douglas Holtz-Eakin, The Death Tax: Investments, Employment and Entrepreneurs, in 84 Tax Notes 782 (Aug. 2, 1999) that the estate tax discourages entrepreneurs from investing their resources in their entrepreneurial activities. The article concludes that the effects of the estate tax on entrepreneurs investing their resources are minimal for two reasons. First, the effective federal estate tax rates applicable to the yield from an investment when the entrepreneur is under age 60 are quite small (0.3% for investors under age 60, 0.1% for investors under age 50). The small effective tax rates probably have a minimal impact on aggregate investment by entrepreneurs, since the majority of entrepreneurs making investment decisions are probably under age 60. Indeed, using Holtz-Eakin's methodology, the article shows that the effective tax rate applicable to entrepreneurs under age 60 results in only a 0.22% decrease in the amount that entrepreneurs with employees would be willing to pay employees. Second, the article argues that the estate tax may have an even smaller impact than these small percentages suggest because of human behavior. Entrepreneurs may exclude the effective estate tax rate from their calculations entirely during their most productive years because of the psychological tendency to deny the inevitability of death.