Changing Views of the Estate Tax: Implications for Legislative Options
Introduction and OverviewThe United States estate tax has long been a lightning rod of tax policy. This tax, technically one aspect of the Unified Transfer Tax, taxes wealth accumulation at death. Policymakers have largely viewed the estate tax through the lens of social policy and issues fairness. However, it has potential effects on capital accumulation, bequests, family businesses and entrepreneurs, labor supply and overall economic efficiency. A better understanding of the economic impacts of the estate tax is crucial for the design of future U.S. tax policy.
These facts are especially important at present, as the estate tax faces an uncertain future, with legislative action likely in the 111th Congress. In the absence of legislation, the estate tax will be repealed in 2010, only to reappear in 2011 with a return to 2000 law. Neither full repeal nor statutory rates reaching 55 percent appear to be politically palatable, forcing Congress to act. This paper examines the possible policy actions that Congress might take in terms of this tax, estimates their likely impact on the overall U.S. economy, small and family businesses1, and entrepreneurial decisions.
To anticipate the key findings, we conclude that the future path of the estate tax has significant impacts on overall capital accumulation in the United States, and the consequent impacts on productivity, economic growth, and the standard of living. Equally significant are the impacts on the composition of economic activity. Decisions by entrepreneurs and family businesses are strongly influenced by tax policy in general, and the rate of taxation on the return to capital in particular. Eliminating the estate tax - as under current law in 2010 - would increase the investment outlays, hiring propensities, and size of family business payrolls. On the other hand, allowing the tax to revert to the high marginal tax rates and low exemptions of the 1990s would have strong negative impacts.
This paper is organized as follows: We begin with a summary of the policy outlook for the estate tax and other capital income taxes. We then present a catalog of the economic impacts of the estate tax and summarize the research literature to date. Armed with this background, we compute and present the estimated impacts of the likely policy options.
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