Let the Death Tax Die
Green collar jobs, high-speed passenger rail, weatherizing houses --
there are a lot of ideas being funded by your tax dollars to, in the
words of President Obama, "put America to work." It's unclear if these
projects will deliver on the President's promise, but it is certain
they will cost you a lot of money. If President Obama and our elected
officials in Washington, D.C., really want to create jobs, though,
there is an easy way to do so (and it's a way that will actually save
you money) -- let the estate tax die.
The connection between the estate tax and job creation may not be an obvious one until you consider that many small businesses are affected by it. By imposing a large marginal tax rate on assets you have accumulated throughout your life, it provides a huge disincentive to save. Instead of promoting the creation of wealth by businessmen and the expansion of business and economic activity, the estate tax penalizes these things. Saving, business expansion, and investment are what we need to help us emerge from this recession, but they are being discouraged by the estate tax.
These concerns are not merely theoretical. There is ample proof that the estate tax destroys jobs. In a study to be released soon by the American Family Business Foundation and the Buckeye Institute, authors Douglas Holtz-Eakin, the former Director of the Congressional Budget Office, and Cameron Smith survey various studies on the estate tax and conclude that small business investment would increase by 3% and 1.5 million new jobs could be created if the estate tax were permanently repealed. In Ohio, we would see over 58,000 new jobs as the result of a repeal.
Considering that President Obama and Congress have spent nearly a trillion dollars in an attempt to create (or preserve) 3 million jobs, a repeal of the estate tax seems like a very efficient way to put people to work. Unfortunately, the politics of the estate tax complicate matters. The tax is actually scheduled to go away next year and anyone who dies in that year will have no tax liability. But in 2011 the tax is reimposed, with a rate of 55% on estates valued at over $1 million.
This "on again, off again" tax policy makes sense only to Washington politicians. To small businessmen, the uncertainty engendered by this one-year repeal is not only frustrating, it is costly. There is a large industry of tax lawyers who make their living off advising clients on how they can avoid the estate tax. They are the only ones who benefit from the current system.
Forcing small businessmen and entrepreneurs who spent their lives saving to either hand over half those savings to the government upon their deaths or spend tens of thousands of dollars to structure their estate to avoid the tax is poor tax policy. Saving and investment should not be penalized. These activities are the backbone of our economy and should be encouraged, not discouraged, by tax policy.
Likewise, forcing one to spend thousands of dollars to take advantage of tax loopholes is an inefficient use of resources. Instead of businessmen using this money to improve their products, expand their businesses, or hire more workers, they must pay lawyers to tell them how to structure their estate in a way to avoid the estate tax. This money is not going to create wealth, as it would be doing without this destructive tax.
The elimination of the estate tax is something that has bipartisan support in Congress. Unfortunately, at a time when there is also bipartisan support for increased government spending, it seems unlikely it will be repealed. It's too bad that politicians can't recognize a real stimulus program when they see one. If they could, the estate tax would already be dead.
Marc Kilmer is a policy analyst with the Buckeye Institute for Public Policy Solutions, a research and educational institute located in Columbus, Ohio.
