Friday, March 27, 2015

Death to the Estate Tax!

Death and taxes are two certainties in life, yet the government seems to combine the two in the estate tax, which is colloquially known as the death tax. This tax was only meant to be a temporary tax back in 1916 to raise tax revenue for WWI. However, once a government entity, regulation, or tax is in place, it ends up being difficult, if not nigh impossible to reverse. We might be seeing an exception here because it could very well end up six feet under, especially after the House of Ways and Means Committee met this week to consider passing H.R. 1105, which is the Death Tax Repeal Act of 2015. It would be interesting to speculate on whether it will be passed, but I'm more interesting to go into why the estate tax should be repealed once and for all.

I could say that we should get rid of the estate tax simply because it's a tax. However, I am a consequentialist libertarian. As soon as people start interacting with each other, the need for government become inevitable. To quote Thomas Paine from Common Sense, "government, even in its best state, is a necessary evil." With that being said, in order to function, the government needs a revenue base. Since there is going to be a government, we might as well call for the most economically efficient taxes out there, and I can tell you that the estate tax does not qualify.

Before delving into why the estate tax makes for bad economics, a bit about the estate tax, particularly why it's also called the death tax. When an individual passes away, the government levies a tax on the estate prior to the heirs splitting the inheritance. In United States tax law, a tax return is required upon death. If the total assets exceed the amount of the tax exemption, which was $5.25 million in 2013, then 40 percent of the estate's value has to be paid in taxes to the federal government.

First, it is hardly fair that even in death, the government can't leave people in peace. Shouldn't we respect the wishes of the individual who just passed instead of finding a way to fill up government coffers? Life is hardly fair, that much I know. But does the tax really fill up government coffers that much? Not really. The estate tax only generated 0.6 percent of 2014 federal tax revenue (which is a slight improvement over the 0.46 percent in 2013). With $3.021T in federal tax revenue, that would total to $18.21B generated by the estate tax in 2014. To be fair, part of the historical decline in estate tax revenues can be attributed to the increase in the exemption and the fact that the statutory estate tax rate used to be 55 percent.

Even if we are to concede those points, it still doesn't negate the fact that the estate tax both creates a tax incidence on savers [as opposed to those who spend immediately] and primarily acts as a levy on domestic capital stock, that very thing that generates wealth in the first place. Countries like Hong Kong, Norway, Sweden, and Russia have eliminated their estate taxes. Perhaps that is the reason that many countries do not use the estate tax as a source of revenue generation. But what about the notion that the estate tax doesn't affect most people? As the Left-leaning Center on Budget and Policy Priorities points out, only 2 out of 1,000 estates will actually owe money on the estate tax. That might sound like it doesn't affect the other 998, but that's not the case because there are still compliance costs. And much like would be the case with a wealth tax, assessing the value of assets is difficult, time-consuming, and expensive. Statistically speaking, the IRS is going on a wild goose chase, which is a waste of taxpayer dollars and a boon for estate-tax lawyers and life insurance companies. As a side note, the estate tax is not as much as a "tax for the super-wealthy" as one would think because people like Bill Gates can tie that money up in a tax-exempt foundation, which puts a damper on the "tax progressiveness" argument.

Wealth passed on from one generation to the next is one of the primary impetuses of economic growth. Stunting that growth in the name of tax revenue (which is feeble to begin with because we should be more concerned with the defects driving debt) or reducing inequality (which is also ridiculous [e.g., Cagetti and de Nardi, 2007], given how little revenue it actually generates, not to mention that most millionaires created their own wealth) is fiscally irresponsible, to say the least. The Tax Foundation ran a model showing that repealing the estate tax would increase capital stock by 1.68 percent and the GDP by 0.58 percent per annum, which would provide a small, but positive boost to the economy and federal government revenues. The Heritage Foundation also found that repeal would create a $46B boost to the economy over the next decade. While I don't think the estate tax is as heinous as the corporate tax, I still think it should have gone six feet under ages ago.

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