Brummett: Estate tax is okay because it affects few people

Series on Estate Tax Part 6

Milton Friedman clears up misconceptions about wealth redistribution, in general,

and inheritance tax, in particular. He shows that this tax does hurt families and

our society. The questioner suggests a 100% inheritance tax but that would

destroy a society. Likewise Brummett below tries to downplay the harmful

effects of the tax by saying it is alright since less than 1% of the USA will be

affected, so lets stick it to them despite the harm it causes to family businesses.

In this series on the Estate Tax I will be quoting portions of the article “The Economic Case Against the Death Tax,”(Heritage Foundation, July 20, 2010) by Curtis S. Dubay. Dubay is a Senior Analyst in Tax Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

Number of Estates Paying Death Tax Not the Issue. A common argument in favor of the death tax is that it only affects a small number of estates and as such has a small impact on the economy. By that logic, a tax that only one taxpayer paid would be an ideal tax, even if that tax ground the economy to a halt. The number of taxpayers that pay a particular tax is economically irrelevant. What matters is the impact the tax has on the economy. By this more accurate metric the death tax is a poor tax because it is a large weight dragging down economic growth.

The number of estates subject to the death tax has declined steadily since passage of the 2001 tax relief. That package steadily phased out the death tax by reducing its rate and increasing the portion of estates exempt from the death tax from $1 million to $3.5 million, before doing away with the death tax entirely in 2010. In 2000, before the tax relief packages began, 52,000 estates paid the death tax. As a result of the increased exemption level, by 2008 (the latest year of available data) just over 17,000 estates paid the death tax.

Fewer estates paying the death tax has reduced the economic cost it imposes, but as long as the death tax remains in place it will continue to slow economic growth, destroy jobs, and lower wages. It is little consolation to workers that remain unemployed or see their pay stagnate because of the death tax that the impact of the tax has been slightly lessened.

Current proposals to resuscitate the death tax and set its exemption level between $3.5 million ($7 million for married couples) and $5 million ($10 million for married couples) would still subject estates that support the most jobs and generate the most economic activity to the death tax. Even though these estates are the most able to afford expensive planning measures to lower their death tax liability substantially, they often cannot escape the tax entirely and therefore still pay large tax bills. These large estates support more economic activity, generate more income, and support more jobs than the estates that would continue to fall below the threshold.

According to data from the Internal Revenue Service “smaller estates (under $3.5 million) make up the bulk of filers—more than 60 percent between 2002 and 2007. Large estates (over $10 million), however, contributed between 18 percent and 30 percent of the total revenue in the same time frame, indicating a disproportionate distribution of tax liability.” Subjecting these estates to the death tax again would continue to put a large number of workers at risk of seeing their wages idle or their jobs destroyed.



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