Policy Debate: Should the Death Tax Be Abolished?

I think it's so irritating that once I die, 55 percent of my money goes to the United States government . . . You know why that's so irritating? Because you already have paid nearly 50 percent.... when you leave like a house or you leave money to people, then they're taxed 55 percent, so you've got to leave them enough so that once they're taxed, they still have some money.... That's why you always hear about people where their aunts left them houses or left them stuff and they can't keep the house because the taxes are so much. 
~Oprah Winfrey, August 4, 1997

. . . In this world, nothing is certain but death and taxes. 
~Benjamin Franklin

While the federal estate tax was originally introduced to provide a source of wartime revenue, it had been kept primarily as a means of redistributing wealth. While economic efficiency may require that individuals be rewarded for high productivity, successful innovation, and risk-taking, it is less clear that their grandchildren, great-grandchildren, and subsequent generations must share in this reward. One of the basic equity issues is whether some individuals should receive larger and higher quality investments in education simply because they were born into a wealthy family. A tax on large inheritances is expected to reduce the extent of wealth inequality across U.S. households. 

Opponents of the death tax, though, argue that an efficiency cost is associated with this attempt to provide greater equity. A high death tax alters incentives to acquire wealth for bequest purposes. The direction of this effect, however, is not obvious. Since a higher tax rate raises the cost of providing a bequest of a given size, it may be expected to result in a reduction in the size of bequests. An altruistic parent, however, who plans to leave a given amount of wealth for his or her children will now have to set aside more funds to meet this goal (as observed by Oprah Winfrey in the quote at the top of this page). Thus, it is not clear whether this tax will reduce or increase the incentive to save (this possibility seems to have been ignored in many of the commentaries appearing in the links below). This is a question that can only be resolved through empirical evidence. 

The most damning evidence against the death tax is provided by a December 1998 Joint Economic Committee study that indicates that the cost of complying with and collecting the tax exceeds the amount of tax revenue generated. Critics of the tax also note that the very wealthiest individuals can afford to hire lawyers, tax consultants, and estate planners who provide assistance in finding legal means of avoiding estate taxes on inherited wealth. 

Another argument against the death tax is that the wealth that is inherited is derived from income that had already been taxed when it was received. Opponents of this tax argue that it is unfair to tax this income twice. Critics also note that the tax rate on large estates in the U.S. is substantially above that of other countries. 

Since the death tax is frequently imposed on nonliquid assets, meeting the tax liability sometimes required the sale of these assets. This may lead to the sale of a family business to meet tax liability. If a family meets the tax liability by borrowing money, this adds to the debt burden of the business at a time when it is already having to deal with the loss of the previous owner. A business failure may become more likely in such a situation. In either case, family-owned businesses may have to be liquidated as a result of the death tax. 
 

Primary Resources and Data

• Internal Revenue Service
  http://www.irs.gov/
  The Internal Revenue Service web site provides an extensive collection of detailed information on the estate tax that exists under current law. Some of the most relevant information may be found on their pages on: 
  • Estate/Wealth/Gift Statistics 
  • Instructions for Form 1041 - Income Tax Return of an Estate (The Adobe Acrobat viewer plugin is required to view this document. You may download this viewer by clicking here.)

• Economic Growth and Taxpayer Relief Act of 2001
  http://www.theorator.com/bills107/hr3.html
  The Economic Growth and Taxpayer Relief Act of 2001 phases out the estate tax over a 10-year period. This page contains the text of this Act.

• American Council for Capital Formation Center for Policy Research, "An International Comparison of Death Tax Rates"
  http://www.accf.org/deathtax699.htm
  This online document, provided by the American Council for Capital Formation Center for Policy Research, contains a listing of the highest marginal estate tax rates for 24 countries. The document notes that the average maximum death tax rate is 21.6% for these countries. Of the 24 countries surveyed, only Japan (with a maximum marginal death tax rate of 70%) has a maximum marginal rate that exceeds the 55% maximum marginal death tax rate in the U.S.

• National Conference on State Legislatures, "State Death Taxes"
  http://www.ncsl.org/programs/fiscal/deathtax.htm
  This online document describes the status of state death taxes. It is noted that many states have eliminated or reduced the level of death taxes in recent years. 

• Isabel V. Sawhill and Daniel P. McMurrer, "Are Justice and Inequality Compatible?"
  http://www.urban.org/oppor/opp_02.htm
  In this online Urban Institute article, Isabel V. Sawhill and Daniel P. McMurrer note that income is more unequally distributed in the U.S. than in other advanced economies and that this distribution has become more unequal over the past 25 years. To examine the consequences of this, Sawhill and McMurrer examine alternative views of distributive justice. They discuss some of the practical problems in devising a generally accepted notion of justice. These problems include the equity-efficiency tradeoff, the nature-nurture debate, and the extent of income mobility over time and across generations. 

• Stanford Encyclopedia of Philosophy, "Original Position"
  http://plato.stanford.edu/entries/original-position/
  This page discusses the theory of justice suggested by John Rawls. He suggests that an economic and political system should be considered to be fair if everyone would have found it acceptable if they had to evaluate it without knowing what position they would occupy. From this premise, Rawls derives several basic principles of justice. Rawls argues that a redistribution of wealth is desirable to redress inequalities caused by the "natural lottery" of birth. 
   

Different Perspectives in the Debate

• 60 Plus Association, "Kill the Death Tax & Save Social Security"
  http://www.60plus.org/deathtax.asp
  This site is provided by a seniors advocacy group that is opposed to the death tax. Their web site contains articles and news items associated with the death tax. 

• Paul S. Speranza, "Statement Before the House Committee on Ways and Means"
  http://waysandmeans.house.gov/legacy.asp?file=legacy/fullcomm/106cong/6-16-99/6-16sper.htm
  Paul S. Speranza, the Chair of the Tax Committee of the Greater Rochester New York Metro Chamber of Commerce, provides a history of the federal estate and gift tax and a series of arguments for the elimination of this tax. He argues that this tax encourages individuals to engage in inefficient activities that are designed for the primary purpose of escaping these taxes. Speranza suggests that billions of dollars are used for estate tax planning and compliance (an amount approximately equal to the amount of tax collected). While wealthier households engage in strategies to evade this tax, smaller family-owned businesses are less likely to be aware of such methods. He argues that this threatens the viability of many family-owned businesses. 

• William W. Beach, "A Scorecard on Death Tax Reform"
  http://www.heritage.org/Research/Taxes/BG1197a.cfm
  William W. Beach argues against the death tax in this June 25, 1998 Heritage Foundation Backgrounder. He suggests that the death tax imposes a burden on "minority and female business owners, farmers, the self-employed, and -- indirectly but just as importantly -- blue-collar workers...." Beach notes that the most wealthy households are able to avoid estate taxes by hiring expensive lawyers and estate planners. He suggests that this makes the estate tax somewhat regressive (for those in the upper-portion of the wealth distribution). Beach also believes that death taxes hurt small businesses, undermine savings, and appear to be the most expensive tax to pay and collect. As part of his discussion, Beach provides a good overview of the changes introduced by the Taxpayer's Relief Act of 1997. He argues that this act did not go far enough and suggests that the death tax should be eliminated. 

• Joint Economic Committee, "The Economics of the Estate Tax"
  http://www.house.gov/jec/fiscal/tx-grwth/estattax/estattax.htm
  In this December 1998 study, the Joint Economic Committee suggests that the estate tax has had an adverse effect on capital accumulation and growth, encourages an inefficient allocation of resources, leads to the dissolution of thousands of family-run businesses, endangers the environment, and is "complicated, unfair and inefficient." This study also suggests that the tax does not reduce inequality, has compliance costs that are approximately equal to the revenue collected, and raises little net revenue for the federal government. The abolition of the estate tax is recommended.

• National Center for Policy Analysis, "Savings & Investment, Estate Tax and Other Tax Breaks"
  http://www.ncpa.org/pi/taxes/tax63.html
  The National Center for Policy Analysis provides a reasonably extensive collection of links to online documents that suggest that estate taxes provide adverse economic effects. 

  Gary Robbins and Aldona Robbins, "The Case for Burying the Estate Tax"
  http://www.ipi.org/ipi/IPIPublications.nsf...
  Gary and Aldona Robbins provide a case against the federal estate tax in this online Institute for Policy Innovation document. They argue that the federal estate tax provides a small amount of tax revenue while doing substantial harm. The authors suggest that the costs of collecting and complying with this law is close to the amount of revenue raised by the tax. Further, they suggest that the tax forces families to sell family businesses, reduces the incentive to save and invest, and is not paid by those who possess the largest estates. (To view this document, the Adobe acrobat viewer plugin is required. You may download this viewer by clicking here.)

• Stephen Moore, "Joint Tax Committee Undermining Tax Cuts"
  http://www.humaneventsonline.com/articles/05-21-01/moore.html
  Stephen Moore argues, in this May 2001 online essay, that the Joint Tax Committee consistently overestimates the revenue cost of tax cuts. He supports the supply-side argument that indicates that lower tax rates lead to higher revenue as a result of increased incentives. Moore provides examples suggesting that lower tax rates have resulted in higher tax revenue in the past. In considering these examples, though, it is useful to consider whether the implicit ceteris paribus assumption is appropriate.

• The Center for the Study of Taxation, "Myths and Public Perception"
  http://center4studytax.com/myths.htm
  The Center for the Study of Taxation provides several arguments against the estate tax on this page. Survey results concerning the public perception of the desirability of estate taxes are also provided.

• Deathtax.com
  http://www.deathtax.com/
  This web site provides a collection of online documents and statistics that suggest that the death tax should be abolished. A FAQ and links to the sites of other organizations that oppose the death tax are also provided.

• Edward J. McCaffery, "Grave Robbers: The Moral Case against the Death Tax"
  http://www.cato.org/pubs/pas/pa353.pdf
  Edward J. McCaffery argues against the death tax in this October 4, 1999 Cato Policy Analysis article. He argues that the tax generates little revenue, results in economic inefficiency, reduces growth, and has collection and compliance costs that are approximately equal to the tax revenue generated. McCaffery also suggests that this tax "discourages economically and socially beneficial intergenerational saving." He suggests that it be replaced by a more efficient and equitable progressive consumption tax. (To view this document, the Adobe acrobat viewer plugin is required. You may download this viewer by clicking here.) 

• Martin and Kathleen Feldstein, "Estate Tax Repeal Makes Sense"
  http://www.nber.org/feldstein/bg022701.html
  In this February 27, 2001 Boston Globe editorial, Martin and Kathleen Feldstein provide an economic case against the estate tax. They argue that this tax generates little revenue while imposing a strong saving disincentive effect. Studies are cited that indicate that the estate tax may also reduce labor supply incentives.

• Bernard Wasow, "Repeal of Estate Tax Removes Incentive for Charitable Giving"
  http://www.tcf.org/Opinions/In_the_News/Wasow-Estate_Tax.html
  In this June 2001 article, Bernard Wasow argues that the repeal of the estate tax will reduce the incentive for charitable donations. He also suggests that the repeal of this tax will "deprive the government of a modest but dependable and highly progressive source of revenue."

• President Bill Clinton, "Maintaining Our Fiscal Discipline by Vetoing One in a Series of GOP Tax Breaks that Would Bring America Back into Deficits"
  http://clinton6.nara.gov/2000/08/2000-08-31-fact-sheet-on-maintaining-our-fiscal-discipline.html
  This veto message explains President Clinton's reasons for vetoing a bill to repeal the estate tax. The memorandum argues that this proposal benefits only a small proportion of households. Clinton suggests that reducing estate taxes (and other taxes) would reduce the social security surplus, raise interest rates, and hinder economic growth. The document also argues that the long-run effect of this tax cut plan would become more severe as the baby-boom generation reaches retirement age. 

• Office of Management and Budget, "H.R. 8 - Death Tax Elimination Act of 2000"
  http://clinton3.nara.gov/OMB/legislative/sap/HR8-r.html
  This July 11, 2000 statement, provided by the Office of Management and Budget, contains a list of reasons for President Clinton's planned veto of the Death Tax Elimination Act of 2000. It is argued that the elimination of the death tax is inconsistent with the priorities of reducing the national debt, preserving Medicare and Social Security, and enhancing human capital investment. This statement also notes that only the wealthiest 2% of the population are subject to the estate tax.

• Office of Management and Budget, "H.R. 8 - Death Tax Elimination Act of 2001"
  http://www.whitehouse.gov/omb/legislative/sap/107-1/HR8-h.html
  This April 4, 2001 statement, provided by the Office of Management and Budget, discusses President Bush's support for the elimination of the Death Tax.

• Tax Analysts Online, "Tax Quotes"
  http://www.tax.org/Quotes/quotations.htm
  This site provides a collection of hundreds of humorous tax quotes. 

• Joel Friedman and Andrew Lee, "Permanent Repeal of the Estate Tax Would Be Costly, Yet Would Benefit Only a Few, Very Large Estates"
  http://www.cbpp.org/6-3-02tax.htm
  Joel Friedman and Andrew Lee, in this online June 20, 2002 Center on Budget and Policy Priorities document, discuss the adverse fiscal effects that would result from a permanent repeal of the estate tax. They note that a permanent repeal is expected to result in the loss of approximately $56 billion in federal revenue in 2012. It is argued that the loss of this revenue when the baby boom generation is retiring in large numbers will cause help aggravate the problems facing Social Security. Friedman and Lee note that, as compared to complete repeal, estate tax reform that maintains an exemption of $3.5 million and a tax rate of 45% would pay for approximately 20% of the projected Social Security shortfall over the next 75 years.