Permanent Elimination of the Estate

Permanent Elimination of the Estate Tax:

Policy Feasibility Analysis

The objective of this work is to apply critical analysis of permanent elimination of he estate tax in terms of whether this is a good policy alternative and in terms of political feasibility.

In the past few years, repeal of the estate tax has taken a prominent position among legislative topics for debate. Various reports cover this issue and analysis has been applied to the feasibility of this permanent eliminate of the estate tax with many differentially derived conclusions. This work will demonstrate that positive effects and negative affects will occur from permanent elimination of the estate tax law and will attempt to determine which alternative in this policy issue is more feasible overall.

COMPUTERIZED MODEL ESTIMATION GOVERNMENT REVENUE CHANGES

The work entitled: "The Effects on Government Revenues from Repealing the Federal Estate Tax and Limiting the Step-up in Basis for Taxing Capital Gains" published by CONSAD Research Corporation in Pittsburg, Pennsylvania states that presently the tax is scheduled to be phased out in 2010 and eliminated and then scheduled for reinstatement in 2001. CONSAD Research Corporation developed a computer model for making estimation of the changes in government revenue that will take place under specific proposals and the first being "repeal the estate tax" (CONSAD, 2003) and the second being "limit the degree to which the step=up in the basis for measuring taxable capital gains can be applied to the value of assets in estates." CONSAD, 2003) According to CONSAD's report "there are several adaptations of economic behavior in response to such a change in tax structure that would offset most, if not all, of the revenues forgone by the repeal of the estate tax." (CONSAD, 2003) the adaptations are stated to include: (1) Positive effect on the rate of capital gains realizations by older taxpayers who currently experience a lock-in effect as they age and plan for their demise; (2) as the heirs of currently taxable estates restructure the portfolios of assets that they inherit, they will realize the accrued capital gains in the assets as they are sold. For most inherited assets, these realizations will also be taxed at the capital gains tax rate after the limited step-up in basis allowance has been exhausted. This will generate substantial revenues as assets are sold; and (3) when investment real estate and other depreciable property in an estate receive a stepped-up basis, the new basis established for the property can be depreciated by the heirs for income tax purposes, thereby reducing the income tax revenues received by the government. Imposing a limit on the step-up in basis will reduce the degree to which the new basis of the inherited property can be depreciated without first selling the property and thereby exposing it to the capital gains tax. Until such sale occurs, the limited step-up in basis will decrease the loss in income tax revenue that would have occurred if the property had received an unrestricted stepped-up basis. (CONSAD, 2003) the following chart shows the 'effects on revenues to the Federal Treasury from repeal of the estate tax and limitation of the step-up in basis for measuring taxable capital gains.

Effects on Revenues to the Federal Treasury from Repeal of the Estate Tax and Limitation of the Step-up in the Basis for Measuring Taxable Capital Gains

Revenues in Billions of Dollars)

Source: CONSAD (2003)

According to CONSAD's report added to the impacts on the tax revenues of government that will result from a repeal of the estate tax and limitation of the step=up in the basis for capital gains taxation is a higher cost in collecting estate taxes than in collecting other taxes which includes costs of litigations expenses, appraisal costs, and IRS and other Treasury Department personnel wages. CONSAD's report specifically states: "In effect, the change in tax policy would simultaneously generate additional revenues from an existing, relatively inexpensive tax collection process and abolish a relatively expensive tax collection process, thereby achieving an increase in net government revenues that exceeds the direct increase in tax revenues. Quantitative estimation of the decrease in tax collection costs is beyond the scope of this study, but the available empirical evidence indicates that it would be substantial." (2003; p.4)

II. CENTER on BUDGET and POLICY PRIORITIES REPORT

The Center on Budget and Policy Priorities report entitled: "New CBO Study Finds that Estate Tax Repeal Would Substantially Reduce Charitable Giving" states study has revealed: "...the effect of the estate tax on charitable giving finds that elimination of the estate tax would cause charitable contributions to fall by large amounts." (Kamin, 2004) Furthermore, this projected drop in contributions "would approach the total amount of giving by foundations..." equaling approximately $25 billion annually. The following figure shows the reform vs. repeal of the estate tax and the resulting effects on charitable giving in 2000.

Reform vs. Repeal of Estate Tax: Options Effects on Charitable Giving 2000 (example)

Reform vs. Repeal:

Effect of Estate Tax Options on Charitable Giving in 2000

Annual Reduction in Charitable Giving

Raise exemption to $2 million or $3.5 million (double that for married couple)

$6 billion

Repeal estate tax

13 - $25 billion

Source: Kamin (2004)

In a 2005 Wall Street Journal Report Herman and Silverman, in the work entitled: "Republicans Consider Keeping Estate Tax Alive for the Very Rich" states that: "Lawmakers and lobbyists leading the death-to-the-estate-tax campaign say they have more supporters than a year ago. But it is unclear if they have enough votes in the Senate to eliminate the tax permanently, and thus several compromise approaches with Democrats and Republicans are likely to be considered." It is related that one idea being considered is taxing for only the most wealthy estates and is a plan inclusive of drastic raising of the basic estate-tax exclusion which is presently at $1.5 million to somewhere in the range of $5 to $7 million upward as well as call for a cut in the top federal estate-tax rate which is presently at 47% to the top capital-gains-tax-rate presently at 15%. Proposals which seek to either cut or altogether eliminate the federal estate tax are facing great opposition as opponents state that a total repeal of estate taxes would "...represent a massive giveaway to a tiny number of super-rich Americans - and that it would be enormously costly to the U.S. Treasury." (Herman and Silverman, 2005) Other issues to consider include the individual rules that states have in relation to the estate tax.

III. MORAL CASE AGAINST ESTATE TAX

The work of Edward J. McCafferey entitled: "Grave Robbers: The Moral Case against the Death Tax" published in the CATO Policy Analysis Journal states that:

Because the death tax is a tax on savings, it also almost certainly suppresses economic growth. Some recent studies even suggest that the cost of the tax falls disproportionately on women, minorities, and owners of small businesses. The main defects of the death tax, however, are not matters of dollars and cents alone. Unlike other recent studies, this one does not focus on the economic aspects of the case against the tax. The biggest problem with the death tax is a moral one. The death tax rewards a "die-broke" ethic, whereby the wealthy spend down their wealth on lavish consumption, and discourages economically and socially beneficial intergenerational saving. The tax does not promote traditional liberal ideals of redistribution, equality of opportunity, or fundamental fairness. It turns out that certain appealing and attainable comprehensive tax reform options -- moving toward a progressive consumption tax, which would fall consistently on spending, not work or savings -- far better serve the goals of tax fairness and common sense. reducing or eliminating the death tax and its absurdly high rates should thus have broad bipartisan appeal." (1999)

McCafferey relates that approximately 1 to 2% of individuals who die each year leave behind enough wealth for generation of any estate tax whatsoever. The following chart illustrates that percentage of the federal revenue which is comprised by gift and estate taxes from 1940 through 2003.

Gift and Estate Taxes (Percentage of Federal Revenue)

Source: McCafferey (1999)

McCafferey states additionally that actual revenues derived from taxation of estates has not experienced any notable growth since 1975. McCafferey states that arguments for the tax may be summarized as follows:

1) the tax is an important and growing source of revenue for the government;

2) the tax adds a degree of progressivity to the tax system in a particularly nondistortionary way;

3) the tax serves as a "backstop" to the income tax, which fails to completely tax savings, as it is theoretically committed to doing;

4) the tax breaks up large concentrations of wealth across generations;

5) Inheritances should be taxed away so that everyone begins the game of life on a level playing field, so as to ensure equality of opportunity; and 6) the tax is an important inducement to charitable giving at death." (1999)

McCafferey states that arguments against the estate tax may be summarized as follows:

Revenue in gross is not raised by the estate tax and it may in fact actually result in lost money on net for the federal government when administrative costs, revenue lost to others taxes and general economic distortions are considered;

Even if we accept "progressivity" as a legitimate aim of a fair tax system -- as most Americans do -- the death tax gets its progressivity in the wrong place. It falls on savers, not spenders;

3) Early and naive advocates of death taxes thought that such taxes would not distort behavior because they fell only on wealth that decedents left behind by accident. Now very strong evidence supports the common-sense idea that people are strongly motivated to leave wealth to their heirs. Death taxes distort the behavior and investment decisions of this important class of "intergenerational" savers;