The Death Tax is an Unjustified Burden on Individuals and the Economy
Immediately after the death of a person, the US Federal and state governments impose Estate Tax on the property of a deceased person. The estate taxes are imposed on the entire property of the decedent. In the US, the system adopted is that the net estate becomes the cost of the property of the decedent after reducing the amounts due to the government under the law. The eligible insurance amount is considered to be a part of the decedent’s estate. Similarly, gifts of property made by a testator are deemed to be a part of the decedent’s estate (Estate Tax).
Estate tax is defined as the deductions made as tax on the decedent’s estate, before its distribution among the legal heirs (estate tax (death tax). In Wall Street Words ). Some people are of the view that estate tax is not a burden on the population, since the tax is imposed on only two percent of the US citizens who die. The death tax generates negligible federal revenues. Taxpayers can transfer major portions of their property to their heirs as tax free gifts. There are various exceptions in the law provided in respect of small businesses and farms. Accordingly, such tax is paid by only those who leave a considerable amount of property at the time of their death (Gale and Slemrod).
Critics of the death tax argue that it would cause a reduction in personal savings and thereby slowdown the growth of the economy. The cost of making a bequest is on the increase and as such the estate tax results in the reduction of savings. Transfer of assets to the legal heirs in the case of farms and family businesses is facing a lot of difficulty due to the death tax. Most of the critics are of the opinion that imposing a tax on the death of a person is immoral and improper. Further, during the life time of the deceased, the property and wealth of that person would have been subjected to various taxes. Thus, imposing an additional tax at death is not justified. There is a tax relief to the contributions to charity. These contributions are deducted from the estate and gift tax base which would result in significant reduction in such contributions. This reduction in contributions would cause an adverse effect on taxes imposed at the state and local levels (Gravelle).
Estate tax is an obstacle to economic growth. Estate tax contributes to lesser revenues to the government than other taxes and it has a significant negative influence on economic growth. It is an additional burden on savings and investments. Whenever an income is earned, the person making such income has to pay a tax on it. Any interest or dividend generated by savings and other investments can also be taxed. Moreover, tax is payable on the appreciated value of assets. Lastly, there is a tax to be paid on the estate of the decedent (Miller).
The present practice is to collect tax on property that is transferred. However, this reduces the amount of funds available for productive activities. Therefore, a reduction of capital takes place in the economy due to these estate taxes. Further, wealth that should have been transferred to workers gets reduced to a large extent. The loss caused to economic growth due to estate tax has the following effects. Estate tax results in a very high cost of compliance. The reason for this high cost is that a large amount of effort has to be put in. Such effort has to be made so that there is proper planning and allocation of the available resources. Moreover, it has been determined that implementing estate tax costs almost the same as the amount of revenue generated by it (Miller).
There are a number of options in estate tax that allow a person to avoid the payment of this tax. However, these options bring about the transfer of resources from highly productive uses to less productive uses. This affects economic decisions and the goal changes from making the best use of funds to transferring funds so that tax need not be paid. The result is that economic decisions are not made in order to improve development but in order to avoid estate tax. A major financial goal is to avoid such tax. Productivity is harmed due to such decisions. The reason is that resource allocation cannot be optimized to improve the economy, because one of the deciding factors is unrelated to increasing efficiency. Whenever tax is imposed on the transfer of property, it hinders the optimal distribution of national capital. Prosperity of the nation requires the free transfer of property. This is due to the fact that such free transfer of property results in the flow of capital to those who will make the best use of it (Miller).
The major drawback with estate tax is that it taxes capital and brings about a reduction in savings and investments. In addition, there is considerable loss to capital, which takes place due to the liquidation of privately owned assets. This liquidation is required as the property has to be brought within the control of the government. Due to this wealth that should have been used for productive purposes is transferred to government projects that are mainly consumption oriented. This causes a reduction in productive activity (Miller).
Moreover, it has been estimated that the federal estate tax brings about a 1.3 to 1.9 per cent increase in the effective tax burden on the income on capital. This situation has the maximum effect, whenever the head of the family is an older person. For example if the head of the family’s age is in the range of seventy to seventy nine years, then the increase of tax on capital due to estate tax is around 1.7 to 2.7 percent. If the head of the family is eighty years old, such increase is in the range of fourteen to nineteen percentage points (Miller).
Estate tax promotes consumption and discourages savings and investments. This is because it brings about a reduction in the return from investment. The result is a slower growth rate for capital stock. The cost of bequeathing a dollar is around two and a half dollars. Therefore, many persons would choose to consume their property rather than bequeath it to their legal heirs. In other words, after estate tax, the amount inherited would be less than half of the value of the amount transferred (Miller).
The situation is alarming and many economists have made a number of calculations. The aim of these calculations was to determine the income tax level that would correspond to the amounts charged under estate tax. These persons have calculated estate tax to be equivalent to an individual income tax rate of sixty seven percent. However, the maximum marginal income tax rate is only 39.6 per cent. Therefore, estate tax offers the same disincentive as increasing income tax by hundred percent. Therefore, it is crystal clear that estate tax adversely affects economic growth by obstructing capital growth. Capital comprises an essential component of economic growth. In the US capital is the major cause of economic development. In short, estate tax adversely affects individual tax payers and the economy. Furthermore, the apparent benefits that it seems to bestow are insignificant in comparison to its undesirable effects (Miller).
“Estate Tax.” Microsoft® Encarta® 2006 [DVD]. Redmond, WA: Microsoft Corporation, 2006.
estate tax (death tax). In Wall Street Words . 2003. 8 July 2007 < http://www.credoreference.com/entry/4709326estate tax (death tax). (2003). DISPLAYURL (accessed July 08, 2007). http://www.credoreference.com/entry/4709326>.
Gale, William G and Joel B Slemrod. We Tax Dead People Brookings Economic Papers . 12 June 2000. 8 July 2007 <www.brookings.edu/views/papers/gale/20000612.pdf >.
Gravelle, Jane. Inheritance Tax: Pros and Cons. 29 January 2003. 8 July 2007 <http://www.policyalmanac.org/economic/archive/inheritance_tax.shtml>.
Miller, Dan. THE ECONOMICS OF THE ESTATE TAX A JOINT ECONOMIC COMMITTEE STUDY. December 1998. 8 July 2007 <http://www.house.gov/jec/fiscal/tx-grwth/estattax/estattax.pdf>.