The Economics of the Estate Tax

Abstract

The federal government has taxed intergenerational wealth transfers since 1916 through the federal estate, gift and generation-skipping taxes. This analysis examines the arguments for and against the federal estate tax and concludes that the estate tax generates costs to taxpayers, the economy and the environment that far exceed any potential benefits that it might arguably produce. The costs of the estate tax are substantial. First, the existence of the estate tax this century has reduced the stock of capital in the economy by approximately $497 billion, or 3.2 percent. Second, the estate tax is a leading cause of dissolution for family-run businesses. Third, large estate tax bills divert resources from investment and employment and often force families to develop environmentally sensitive land. Conversely, the benefits of the estate tax are small and often overstated. Notably, empirical and theoretical research indicates that the estate tax is ineffective at reducing inequality, and may actually increase inequality of consumption. Moreover, the estate tax raises very little, if any, net revenue for the federal government. In fact, the distortionary effects of the estate tax result in losses under the income tax that are roughly the same size as estate tax revenue.