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1 J. D. Foster, Is the Estate Tax a (Revenue) Loser 1 (1999)

handle is hein.taxfoundation/isestserxz0001 and id is 1 raw text is: TAX ~M6% FOUNDATION December 1999 Is the Estate Tax a (Revenue) Loser? In a stunning shift in tax policy, the federal estate and gift tax may soon land on the scrap heap of worn out tax policies. The 1999 tax cut vetoed by President Clinton included the com- plete phase-out of the death tax. Even though the President objected to the magnitude of the cuts, criticism of the estate tax repeal was muted. Governor Bush, the presumptive Republican nominee for the White House in 2000, has in- cluded the phase-out in his tax plan, while other Republican contenders support immediate re- peal. The estate tax has become so unpopular that even liberal politicians are starting to call it the death tax. Parris Glendenning, Governor of Maryland, has suggested that Maryland pull the plug on its estate tax, though both )emocratic contenders for the Presidency still support the federal estate tax. Arguments for Repeal There are many good reasons to repeal the estate tax. It prevents small businesses and farm- crs from passing their businesses on to the next generation. It penalizes saving and capital forma- tion. And it greatly discourages the creation of new wealth by America's most innovative, pro- ductive entrepreneurs. Another reason it has fallen out of favor is that its policy justification is invalid in our new, information economy. The estate tax enjoyed broad support on the grounds that it prevented an excessive concentration of wealth. The fear was that huge amounts of wealth would remain in the hands of the same few families, genera- tion after generation. Fortunately, the economy each year is generating vast amounts of new wealth and large numbers of newly rich people. The economy has solved the concentration-of- wealth problem far better than the estate tax ever could. The Misleading Estimates of Estate Tax Revenue With all this against it, the estate tax has one last remaining ally, and that is the belief, sup- ported by official estimates, that it brings a lot of money into the U.S. Treasury. In fact, it certainly does not raise nearly the money that the official estimates show, and it may even lose money. There are five reasons why, and the first two come under the general heading of robbing the income tax to avoid the estate tax. 1. The estate tax reduces the effective income tax rate levied on billions of dollars in capilal income. Under current law a tax- payer may distribute up to $10,000 tax-free each year to any person he or she chooses. Typically, one would expect the donor's personal income tax rate to be either 36 or 39.6 percent, whereas the children and grandchildren who are the re- cipients are more likely to be in the 0, 15, or 28 The estate tax certainly does not raise nearly the money that the official estimates show, and it may even lose money percent tax brackets. Thus, the income subse- quently earned on these gifts is subject to a much lower tax rate as a result of the gift. For example, suppose a donor distributes $10,000 in dividend-yielding stock to each of his ten children and grandchildren, for a total distri- bution of $100,000. The distribution would produce perhaps $8,000 in dividend income ByJD. Foster, Ph.D. Executive Director and Chief Economist Tax Foundation I

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