An increased 55% estate tax rate and a reduced exemption amount of USD1m await taxpayers if the US Congress fails to take action before the end of this year. At present the death tax and the gift tax are unified with an inflation-adjusted USD5m exemption amount and a tax rate of 35%.
What Is It?
The estate tax is a tax on an individual’s ability to transfer property after his or her death. There have been numerous temporary estate taxes throughout America history, but the first permanent estate tax was established in 1916.
The current federal estate tax has three major parts: the traditional estate tax, the gift tax (a tax on transfer of wealth during life), and a generation-skipping transfer tax (a tax on transfers to generations at least twice removed).
Appealing for its repeal Ranking Member of the US Senate Finance Committee Republican Orin Hatch has said that “the death tax adds inefficiency to our economy and is what economists refer to as a deadweight loss. In other words, it creates another burden on our free market system that prevents the full potential of economic growth.”
New support for this view is also found in a report of the Joint Economic Committee Republicans released at the beginning of the summer criticizing the federal estate tax because it:
- reduces the amount of capital stock in the economy and has reduced the amount of capital stock in the U.S. economy by roughly $1.1 trillion since its introduction as a permanent tax in 1916, equivalent to 3.2 percent of the total capital stock;
- is an overwhelming cause of the dissolution of family businesses and is a significant hindrance to entrepreneurial activity because many family businesses lack sufficient liquid assets to pay estate tax liabilities; and
- does not reduce income and wealth inequality and in fact perversely, the tax creates a barrier to income and wealth mobility
The Report concludes that the abolition of the estate tax would actually increase overall federal tax revenue in at least two ways:
(1) the estate tax robs additional federal tax revenues from the collection of other taxes like the income tax, and
(2) a larger total capital stock could increase income tax revenue.
(For the full report called “Cost and Consequences of the Federal Estate Tax: An Update”: http://www.jec.senate.gov/republicans/public/?a=Files.Serve&File_id=bc9424c1-8897-4dbd-b14c-a17c9c5380a3.)
The Estate Tax: Even Worse Than Republicans Say.
The Tax Foundation agrees and has commented that “the estate tax is looked on as the smallest source of revenue of any major tax in the US. In 2011, it raised roughly 0.05% of all federal revenue, and, in 2012, projections show that the estate tax will only raise 0.42% of federal tax collections.”
It also argues that predictably, tax revenues are kept artificially low as US taxpayers make economic decisions to avoid the estate tax, such as by making charitable donations, using a ‘stepped up’ basis for asset valuations, sophisticated estate planning using offshore financial centres and adherence to what the Tax Foundation refers to the ‘die broke’ mentality.
Cost-Benefit Analysis Doesn’t Add Up!
The Foundation also cites studies that found that the compliance costs associated the state planning industry exceed the revenue yield of the tax itself. It asserts too that “the entire estate planning industry which has been created in response to the existence of a complex federal estate tax “contributes virtually nothing to economic growth, is wasteful, as the resources employed in this industry could be better utilized elsewhere.”
Besides Death and Taxes…
Whatever the outcome of the abolitionist agenda, besides death and taxes, it is also certain that the US is facing a ‘fiscal cliff’ of expiring tax cuts and automatic spending reductions at the beginning of 2013 of which the death tax is a part.
However, whether the economy will swerve ‘left’ or ‘right’ to avoid falling over this precipice is still anybody’s guess.