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156 IRET Congressional Advisory 1 (2003)

handle is hein.taxfoundation/iretcgadv0153 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. June 26, 2003 Advisory No. 156 REPEAL OF THE ESTATE TAX: GOOD FOR THE BUDGET AS WELL AS THE COUNTRY The federal estate and gift tax, or unified transfer tax - a.k.a. the death tax - is one of the most controversial features of the federal tax system. The 2001 tax cut provided for a phased reduction in the estate tax rates through 2009, and will then eliminate the estate tax in 2010, while retaining the gift tax. However, due to the sunset provision imposed on that bill by federal budget rules, the estate tax will reappear at its full pre-reform rates in 2011. The House has recently voted to make the repeal of the estate tax permanent. charities; the government loses a portion of the income tax revenues on the subsequent earnings of the assets and on the charitable deductions taken by the donors. Each of these reactions is enough, by itself, to offset the revenue from the estate tax. Together, they probably cost the government two dollars for bably reduces every dollar the estate tax collects. totalt jeaerat revenues, ana certainly lowers the incomes of ordinary working peole. The Senate must still act on the matter. Some Senators and policy experts favor total repeal. Others have suggested either lowering the rate or raising the exempt amount, retaining the tax for at least some large estates. Before deciding the issue, one should ask, what is the purpose of the tax? Is it to raise revenue? Is it to redistribute wealth to benefit people with lower incomes? If so, please note: The estate tax probably reduces total federal revenues, and certainly lowers the incomes of ordinary working people. The estate tax reduces capital formation, and thereby lowers productivity, wages, employment, and federal revenues from the payroll and income taxes. The estate tax encourages upper bracket savers to transfer, sooner than otherwise, their assets to their lower bracket children and to tax exempt Thus, in addition to being bad for the country, the estate tax is bad for the federal budget. It is bad policy to impose a tax that places very high economic and compliance costs on the public relative to the amounts raised. It is the height of foolishness to impose a tax that actually costs the government more money than it brings in. Terrible Economic Policy The income tax is heavily biased against saving and investment (see below). These tax biases, of which the estate and gift tax are but one layer, are real and they have serious consequences. They have discouraged several trillion dollars in saving and investment, considerably retarding the growth of productivity, wages, and employment, and slowing the growth of individual income and wealth. The biggest losers from the heavy taxation of saving have been workers deprived of the capital they need in order to become more productive and more highly paid. Remember, taxes on capital income are substantially shifted to labor, because savers and e~em 0 1 I6~ 8 The estate tax pro

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