New Estate Tax Report Argues for Fundamental Change

June 10, 2006

For immediate releaseMedia contact: William Ahern (202) 464-5101

Washington, D.C.— In the wake of efforts to reform or repeal the federal estate tax, the Tax Foundation has released a new report on the economic impact of the tax and a survey of its 90-year history.

“There is a large economic literature showing the estate tax has a negative effect on entrepreneurship, imposes large compliance costs on the U.S. economy, and is not an important source of federal revenue,” said Patrick Fleenor, Chief Economist at the Tax Foundation and co-author of the report. “As one of the nation’s most inefficient taxes, the estate tax is hard to justify from the perspective of economic efficiency.”

The report examines two common arguments in favor of the estate tax — that the economic burden falls entirely on wealthy estate holders, and that it is an important source of tax revenue — and concludes neither argument is supported by past economic studies. In addition, the report details the high “paperwork burdens” imposed by the tax, and its negative effects on new and growing companies.

“Some past studies have estimated the cost of complying with the estate tax to be roughly equal to the amount of revenue raised — nearly five times more burdensome than the notoriously complex federal income tax,” said Fleenor. “These costs represent pure economic waste burned off of economy, on top of estate taxes paid.”

The report details the legislative history of the estate tax from 1916 to the present. Currently the tax is scheduled for repeal in 2010, only to reappear in 2011 at levels specified by 2001 law. The report includes projections of estate tax revenues and returns if the tax is left unreformed by Congress in coming years.

In April 2005 the U.S. House of Representatives voted to permanently repeal the federal estate tax (H.R. 8). Similar legislation is currently pending before the U.S. Senate (S. 420), and lawmakers are expected to vote on the legislation next week.

As an alternative to repeal, a compromise has been proposed by Sen. Jon Kyl (R-Arizona). His proposal cuts the estate tax rate from 46 percent to 15 percent, and exempts estates of $3 to $6 million per spouse.

“While Kyl’s compromise bill would alleviate the burden of the estate tax for thousands of taxpayers, it would make the mistake of leaving one of the nation’s most inefficient and unfair taxes in place,” said Scott A. Hodge, President of the Tax Foundation. “The estate tax penalizes hard work, savings and investment, and it rewards spendthrift consumption. It should be fundamentally reformed or repealed.”

The Tax Foundation has monitored tax policy at the federal, state and local levels since 1937. Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonprofit, nonpartisan 501(c)(3) organization.

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