By: Matthew Glans
Few taxes imposed by state and local governments are more controversial than the estate tax, popularly referred to as the “death tax.” Estate taxes are levies on property transferred from a deceased person’s estate to relatives or other parties. The federal estate tax was established World War I to act as a temporary source of defense funds. The U.S. federal estate is now the fourth-highest death tax among developed countries.
The death tax remains incredibly unpopular. Americans for Tax Reform (ATR) notes in dozens of polls, the estate tax has consistently been opposed by nearly 70 percent of adults, registered voters, and likely voters. Legislation to repeal the tax has even seen some bipartisan support; the last repeal bill considered by the U.S. House of Representatives passed by a 240–179 vote before failing in the Senate.
Despite the widespread opposition to estate taxes, President Barack Obama and Democratic Party presidential candidate Hillary Clinton have repeatedly said they would support measures that would expand these taxes.
Clinton has called for an increase to the federal death tax for many years. Recently, she increased her proposed hike from a 5 percentage point increase to a 10 percentage point increase, which would move the rate from 40–50 percent to as high as 65 percent. According to ATR, Clinton’s new estate tax would tax “all estates over $10 million at 50%, apply a 55% rate on estates over $50 million, and go to 65% on assets above $500 million.” The top rate would be the highest estate tax rate since 1981.
Obama’s estate tax reform would not increase the tax rate, but it would expand the number of people and assets subject to the tax. As reported by ATR, in early September the Treasury Department announced a rule change affecting the estate tax. The new rule “limits the use of two valuation discounts that families can take when assessing their Death Tax liability – a lack of control discount and a lack of marketability discount.”
The “lack of control discount” is claimed when a family holds a minority ownership stake in an inherited asset. A “lack of marketability discount” applies when an asset held by the inherited family cannot easily be liquidated due to market or economic barriers. The new rule would expand the estate tax to many new families and add several new layers of complexity to an already complicated process.
Proponents of high estate taxes argue the tax creates additional revenue for government and benefits charities by increasing the incentive to donate prior to death. Opponents say the estate tax is a form of double taxation that places an undue burden on family-owned businesses and farms. They also note it acts as a tax on capital and entrepreneurship, which slows business activity, destroys jobs, and lowers salaries.
According to a study from the Joint Economic Committee’s Republican staff, the federal estate tax has “cumulatively reduced the amount of capital stock in the U.S. economy by over $1.1 trillion in the past century.” Removing the tax would inject these dollars back into the economy.
Repealing the death tax could create much needed economic growth. The Tax Foundation estimates repealing the death tax would reap an enormous benefit for the economy with nearly 150,000 new jobs and an additional .08 percent in much-needed economic growth over just ten years. The amount of tax revenue lost is far less than most people realize. According to the IRS, the federal estate tax produced around $12.7 billion in revenue in 2013, this accounts for less than 0.1 percent of federal revenue.
State estate taxes are even more problematic for state budgets, because it is easy for taxpayers to move from a state with a high estate tax state to another with a lower rate. A 2004 National Bureau of Economic Research study found states have lost as much as one-third of their estate tax revenues because “wealthy elderly people change their state of residence to avoid high state taxes.” One example offered by The Heritage Foundation reveals how a “successful New York business owner with $50 million of lifetime savings can move his family and company to Florida, Georgia, Texas, or 28 other states and cut his death-tax liability by more than $7 million.”
While proponents of the death tax say the tax is a way to bring equality to the tax system and target the wealthy, death taxes more frequently burden small businesses, especially family farms. Frequently smaller businesses do not have the liquid assets to pay the tax and are forced to reduce investment in their business, cut employees or accept closure or buyouts.
Estate taxes are a form of double taxation that stifle investment and entrepreneurship, reduce economic growth, discourage savings, increase the cost of capital, raise interest rates, and bring in relatively little revenue. Lowering the estate tax or eliminating it completely would create jobs and promote savings and investment while not penalizing individuals who saved for the next generation. State and federal lawmakers should consider reducing or eliminating this tax.
Matthew Glans ([email protected]) is a senior policy analyst at The Heartland Institute.