The Estate Tax is a Poor Source for Federal Revenue

The estate tax is one of the least effective means of raising revenue in the federal tax code. It combines high administrative costs, low revenues, and implicit taxes on capital. It has a slippery base that creates a cottage industry of tax planning – resources that could be better used in the productive economy. It produces little revenue – only about $18 billion per year. And it is a tax on capital formation, which is highly elastic with respect to tax.

Using the Tax Foundation’s Taxes and Growth Model, we modeled the effects of eliminating the estate tax. The effects were as follows:

The estate tax is levied entirely on private saving, or capital stock. Eliminating this tax would, over the long term, increase the capital stock by 1.68%, improving wages. The positive total federal revenue from these long-term changes would outweigh the modest amount of revenue lost from eliminating the tax.

Accumulated wealth is what makes America – in the aggregate – richer. While the direct benefits of estate tax elimination would accrue to wealthy individuals, the indirect benefits of the higher capital stock accrue to everyone. Workers in rich countries have high wages precisely because they have a lot of capital to work with, and a lot of education and skill in the use of that capital. A tax on that capital hurts those workers.

Those who are interested in raising federal revenue from wealthy individuals in an effective manner should look to taxes that are more direct, more income-based, and easier to administer.