Is the Federal Estate Tax Good for Anyone?

A look back at the ten-year phase-out and subsequent re-installment of the federal estate tax raises a few questions, not the least of which is, “Is the estate tax good for anyone?” Some compelling economic literature on the topic suggests that it is not.

Estate taxes are generally levied for two reasons: To break up concentrations of dynastic wealth and to raise significant tax revenues. The seminal 1987 NBER paper by B. Douglas Bernheim, Does the Estate Tax Raise Revenue?, suggests that the estate tax accomplishes neither of these goals. The research is detailed but the logic is intuitive.

Regarding the first aforementioned goal, the wealthiest Americans—those actually paying the estate tax due to its highly progressive nature (see Piketty and Saez, 2006)—are best equipped at avoiding a great deal of the tax by using extensive estate planning. The electronic age in which we live makes avoidance perhaps the easiest it has ever been by disseminating information about seminars (e.g. those conducted by the Society of Financial Service Professionals) and proliferating online estate planning tools. Bernheim argues (even before the internet age) that a high avoidance capability neutralizes the tax’s intent of wealth division.

Regarding the second purported goal of the estate tax, Bernheim continues to explain how this capability also depresses income tax revenues to the point of near revenue neutralization. In addition, a 2001 NBER paper by Douglas Holtz-Eakin and Donald Marples concludes that levying an estate tax results in lower capital accumulation.

An even bigger proclamation is made by Dick Patten in a relatively recent post which cites an American Family Business Foundation study finding that:

For every $1 increase in Federal Estate Tax revenues… state and local governments lose almost $3 in nonestate tax revenues. But if eliminated, state and local revenues would actually increase annually by over $9 billion.

A 1999 Tax Foundation Commentary by J.D. Foster analyzes the topic yielding similar results. These findings strongly suggest that the tax also fails to accomplish the second aforementioned goal.

Current data show that federal estate and gift taxes (gift taxes are taxes on living gifts meeting certain criteria) combined comprise a mere 0.9% of tax revenues. If that number still looks large, consider once again that this appears to simply be displaced income tax revenue. This displacement occurs in large part because taxing estates encourages charitable giving, educational spending, and other expenditures that lower an individual’s tax liability. Without the incentive created by the estate tax to use such exemptions, individual income tax receipts would likely be higher.

Simply put, the federal estate tax does nobody any good.