The estate tax is ineffective at either raising revenue for the government or decreasing income inequality, according to a report released by the congressional Joint Economic Committee.
“This study confirms that the cost of the estate tax far exceeds any benefits it produces,” the report found.
The estate tax, commonly referred to by Republicans as the death tax, also hinders entrepreneurship via family businesses.
“Its repeal would increase economic growth and some studies even find that it would raise tax revenues,” a separate analysis released by the Tax Foundation concluded.
“The estate tax has a higher compliance costs than it collects in revenue, in total,” Tax Foundation economist and analyst Scott Drenkard told The Daily Caller News Foundation. He co-authored the group’s study. “That means estate planning, and paying lawyers so that you can plan your estates, all the things that go into that complex field are what we can think of as economic waste because they are totally created by complying with the estate tax.”
If “taxmageddon” occurs — the scheduled expiration of the Bush tax rates if Congress doesn’t act — the estate tax rate will rise and the threshold for being hit with the tax will fall.
“To me , tax policy is about raising revenue for necessary government services,” Drenkard said. “Given that the estate tax raises so little in revenue and creates so much of a burden on the economy, it doesn’t seem like it’s the best way of going about raising necessary revenue.”
The study also points out that the redistributive tool is ineffective with its goals and, “[p]erversely… creates a barrier to income and wealth mobility.”
Estates often include family businesses. When the legal owner passes away, much of that business goes away due to the estate tax. “The estate tax is a significant hindrance to entrepreneurial activity because many family businesses lack sufficient liquid assets to pay estate tax liabilities,” said the JEC study.
“If you have a family business,” Drenkard said, “it’s hard to grow a business to an appropriate scale, because every generation you are taxed away rates as high as 50 percent of whatever the size of the business is. Corporations don’t suffer from that because they have shareholders.”
“It’s a not a very neutral way of applying a tax to businesses,” Drenkard continued. “It’s hard to grow to the appropriate scale to provide products to consumers if every generation you’re being taxed away half of whatever the business size is.”
The tax currently takes 35 percent of an individual’s net worth after $5 million. That’s scheduled to shoot up to 60 percent next year if Congress doesn’t act.
Since being enacted nearly 100 years ago, the estate tax has raised just under $1.3 trillion, the equivalent of the U.S. federal deficit in 2011 alone.
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