A study released this week by the Joint Economic Committee found that the death tax fails to produce any recognizable benefits and significantly hinders economic growth in the U.S.
The study shows that the death tax fails to achieve any of the goals that it was intended to achieve.
Specifically, the death tax has: (1) reduced the amount of capital stock in the U.S.; (2) significantly hindered entrepreneurial activity; (3) prevented economic mobility; and (4) raised an insignificant amount of revenue.
The death tax has reduced the amount of capital stock in the U.S. Over the 96 years in which the death tax has been enacted, it has "reduced the amount of capital stock in the U.S. economy" by almost $1.1 trillion. This $1.1 trillion reduction in capital stock almost totals the entire amount of revenue raised by the death tax since its implementation in 1916.
The death tax has significantly hindered entrepreneurial activity. The JEC's study found that the death tax is the "overwhelming cause of dissolution of family businesses" because such businesses are likely unable to comply with estate tax liabilities. A study recently released by the Tax Foundation found that the estimated cost of complying with the death tax totals over $88 million, in addition to 2.3 million hours of average compliance effort. As such, the death tax remains a large hindrance to entrepreneurial activity.
The death tax has prevented economic mobility. The death tax discourages savings and instead encourages consumption. To exemplify this, the JEC study found that for persons faced with a potential 55 percent marginal tax rate, "it costs $2.22 for a decedent to give $1 of pre-tax assets as a result of estate and gift taxes." Thus the JEC reasons that people will spend assets as opposed to saving.
The death tax has failed to raise a significant amount of revenue. According to the most recent CBO estimates, the revenue from the death tax and gift tax combined for 2011 equaled out to "less than one-half percent" of all federal revenue, and a mere 0.05 percent of GDP. Relative to spending by the federal government, the revenue from the death tax "would cover less than one day of federal spending."
The JEC's report further points out that abolishing the death tax would raise revenue in two ways: (1) "the estate tax robs additional federal tax revenues from the collection of other taxes like the income tax; and (2) a larger total capital stock could increase income tax revenue."
Absent congressional action, the estate tax rates will soon revert back to pre-EGTRRA levels and the estate tax exemption will reach $1 million in 2013.