The Economics of the Estate Tax: An Update

Abstract

This analysis examines the arguments for and against the federal estate and concludes that the estate generates costs to taxpayers, the economy, and the environment that far exceed any potential benefits that it might arguably produce. This paper updates a previous Joint Economic Committee report on the federal estate tax. Based on the analysis presented here, the existence of the estate has reduced the stock of capital in the economy by approximately $497 billion, or 3.2 percent. The estate is a leading cause of dissolution for thousands of family-run businesses, diverting resources available for investment and employment. The estate is a virtue tax in the sense that it penalizes work, saving and thrift in favor of large-scale consumption. On the flip side, the analysis finds the benefits to be comparitvely less. Empirical and theoretical research indicates that the estate is ineffective at reducing inequality and may actually increase inequality of consumption. The estate raises very little, if any, net revenue, since the distortionary effects of the estate result in income losses that are roughly the same size as estate revenue. In addition, estate taxes force the development of environmentally sensitive land. Through 2001, 2.6 million acres of forest land were harvested and 1.3 million acres were sold each year to raise funds to pay for estate taxes.