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1 J. D. Foster, The Gift and Estate Tax and Economic Performance 1 (1995)

handle is hein.taxfoundation/taxfaavc0001 and id is 1 raw text is: TAX TO FOUNDATION February 1995 The Gift and Estate Tax and Economic Performance House Ways & Means Committee Testimony The following testimony was presented by Dr. Foster before the House Ways & Means Committee on February 1, 1995. Mr. Chairman and Members of the Com- mittee, my name is J.D. Foster and I am the Ex- ecutive Director and Chief Economist of the Tax Foundation. It is an honor for me to ap- pear before your committee today on behalf of the Tax Foundation to discuss the Federal gift and estate tax. The Tax Foundation is a non-profit, non- partisan research and public education organi- zation that has monitored fiscal policy at all levels of government since 1937. The Tax Foundation is neither a trade association nor a lobbying organization. We do not take posi- tions on specific legislation or legislative pro- For those who have inherited wealth or who have sold their businesses after building them up, the estate tax creates a powerful incentive to consume this wealth since much of it will otherwise be lost to the federal government. posals. Our goal is to explain as precisely and clearly as we can the current state of fiscal policy and the consequences of particular leg- islation in the light of established tax prin- ciples, so that you, the policy makers, may make informed decisions. Aside from its ability to raise revenue for the federal government, the estate tax is most often justified by the need to ensure a particular sense of fairness in the overall tax system and to gov- ern who receives the fruits of our economic system. Against this social policy are raised the questions of fairness to the individuals pay- ing the tax and the economic costs imposed on the taxpayer and on society as a whole. The federal gift and estate tax is a unique feature of the federal tax system. It is not a tax on income, though it can influence the incen- tives to earn income; it is not a tax on con- sumption, though it can affect lifetime con- sumption; nor is it a tax on a particular activ- ity. It is a tax on the net economic product of an individual after all other economic activity has concluded. As such, analysis of the distor- tions it imposes on the economy are unique and these will be the subject of my testimony. Taxes distort the allocation of resources in the economy by altering the relative prices of goods, services, and factors of production like capital and labor. In the absence of taxes and other government policies, the economy tends to allocate its resources to produce those goods and services that are most in demand. Prices are the signals that indicate where re- sources should flow. Goods and services that command relatively high prices in the market, such as cars and medical attention, attract a greater flow of capital and labor than do prod- ucts that command relatively low prices. Taxes alter the prices that direct the allocation of resources so that resources are directed to- wards less productive and less valuable uses, thereby reducing the quantity and value of the economy's product. The nature of the disincentives imposed by the estate tax varies according to the eco- ByjD Foster Executive Director and Chief Economist Tax Foundation 1B -1 F

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