Repeal a Tax to Gain Revenue?

Not all tax cuts are equal. Some tax cuts do more for the economy than others. If the end result is a net gain for the American economy a tax cut shouldn’t ever be taken off the table simply because it is a tax cut. A new study that has been released by the American Family Business Foundation demonstrates real effects resulting from a permanent full repeal of the death tax. This tax is applied to individuals whose income is taxed when they transfer it (after they die). Currently, the tax is applied to a smaller extent (historically) but current law schedules a massive increase in this tax. The tax is particularly burdensome on small business owners, especially farmers who under the death tax, or estate tax, face harsh taxation when they die and hope to transfer their gains to their families. This tax puts a tough burden on businesses hoping to stay afloat when the owner dies, especially when it is a family business that has been operated through personal taxes.

Like many other tax laws this one in particular has unintended consequences of hitting hard the (supposedly) unintentional target of small business owners and families; while at the same time, largely failed to hit the “target” of the super wealthy. This, in addition to its harmful economic effects, has led to many calls for its permanent full repeal. However, cutting any kind of taxes is seen as a non-starter to most Congressional Democrats as it would decrease revenues. The new study from economist Stephen Entin seeks to demonstrate the true effects of permanent full repeal.

In scoring the Death Tax Repeal Permanency Act, Entin acknowledges that a static score reveals a substantial loss in tax revenues over ten years. A static score refers to the method in which changes to current law assume the exact same behavior, often ignoring even commonsense changes that would take place as a result of changes in law. If the Act is scored on a static model $460 billion is lost in revenues from 2011-2021. The majority of the report however, demonstrates that if the law were repealed many changes in behavior would take place. By raising wages, capital investment, and increasing revenues from other tax sources, the report outlines how static scoring grossly overestimates losses in revenues. In fact, an alternative score was offered in the report using a dynamic scoring method. This method incorporates the most likely changes in individuals and/or investment behaviors as the result of a change in law.

In the first few years there was still shown to be an overall loss of tax revenues, but in the later years there were large gains in overall revenues. In the end, the dynamic model showed that there would be no revenue lost over ten years as a result of eliminating the death tax, but there would actually be a substantial gain in revenues from other sources. Total there would be about $89 billion gained in revenues from the current law baseline as behavior changed in reaction to passing the Death Tax Repeal Permanency Act. The dynamic scoring model represents an accurate picture of positive overall revenue growth in the next ten years while helping small businesses if the Death Tax Repeal Permanency Act were to be passed.