The American Council for Capital Formation presents a question- and-answer guide to estate tax repeal.
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The following special report, Questions and Answers on the Estate Tax Repeal, was prepared by the American Council for Capital Formation to address some of the key public policy issues raised in the current estate tax debate. For more information, please contact ACCF Chairman Charls E. Walker or ACCF President Mark Bloomfield.
2000 American Council for Capital Formation
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Questions and Answers On Estate Tax Repeal
[1] Question: Wouldn't estate tax repeal benefit only the wealthiest 2 percent of the population?
[2] Answer: ACCF Chairman Charls E. Walker, a former Deputy Secretary of the Treasury, points out the worthiness of a tax should not be judged in terms of the number of taxpayers who benefit therefrom. Rather, it is generally agreed that the major criteria for a "good tax" are simplicity, fairness, and economic impact.
[3] As to simplicity, the federal estate tax is so complex that unclosable loopholes abound. The result is that only an elite group of expert tax lawyers and accountants can interpret it -- at considerable cost to the individuals with even modest estates.
[4] As to fairness, the federal estate tax violates a basic principle of federal taxation -- it is a tax on wealth rather than on income. This is a principle to which the vast majority of Americans would probably subscribe.
[5] Moreover, the unfairness of the federal estate tax to the individual is increased significantly by the fact that it taxes saving that has already been taxed at least once. Most Americans would probably agree that their saving involves very hard work and should not be taxed at all (note the popularity of tax-deductible 401(k)s, IRAs, Keoghs, etc.).
[6] As to the economic impact, the importance of a high and sustained rate of saving and investment (capital formation) to creating good jobs, promoting strong economic growth, and fostering international competitiveness is widely recognized. Multiple taxation of saving in a globalized world that needs ever more saving and investment makes no economic sense whatsoever.
[7] In short, saving is good for the individual and good for the country. Why tax something that is good?
[8] Question: Isn't the "cost" of repealing the federal estate tax so large -- as much as $50 billion per year in the future -- that it threatens our ability to pay down the debt, reform Medicare and Social Security, and provide for other real social needs?
[9] Answer: No one should trifle with the tremendous progress this country has made in ending deficit spending or with the legitimate demands on the budget surplus. That being said, there are two points to keep in mind.
[10] The $50 billion per year revenue loss forecast is controversial, in part because revenue estimating is an extremely difficult task, especially over the long term. Consideration should also be given to the dynamic, not just the static, effects of changes in tax law. In addition, as noted above, these static estimates ignore elimination of "step-up" in basis, as well as important economic considerations.
[11] It is true that repeal of the estate tax would result in some static revenue loss to the federal government, but the more basic question is whether the estate tax itself is an efficient and sound revenue raiser for the government. Many tax policy scholars do not believe so. The cost to the government of collecting the tax, the significant compliance costs for tax lawyers and accountants, the extremely high marginal rate (55 percent), and the injurious impact of the tax on the economy all suggest that if the government wants to raise revenues, it should look to another source.
[12] Question: Proponents of repealing the estate tax point out the very legitimate concerns family businesses and farms have with the estate tax under current law. Why not just exempt family businesses and farms from the estate tax?
[13] Answer: An attempt to provide a "carve out" for family businesses and farms already exists in current law through Internal Revenue Code section 2057. Code section 2057 is complex and restrictive and few families qualify. Many estate tax lawyers point out that one can try once again to reform this section of the tax code, but it is very difficult to make it work. There are complex and restrictive definitions, punitive limits on a family's flexibility after the decedent's death, and large expenses for professional advice, all of which suggest that current law cannot simply be "fixed." Repeal, therefore, is the only course.
[14] Question: Why not raise the basic estate tax exemption, currently $675,000 and scheduled to rise in stages to $1 million in 2006?
[15] Answer: Raising the exemption level is desirable in itself but does not address the need to repeal an archaic tax that is both unfair and antigrowth.
[16] Question: How do estate and inheritance taxes in the United States compare to those of other countries?
[17] Answer: Many countries tax estates (or inheritances) more lightly than does the United States, according to a recent survey of 24 industrialized and developing countries compiled by Arthur Andersen LLP for the ACCF Center for Policy Research (see figure). In fact, the U.S. marginal estate tax rate is higher than that of all other countries surveyed except Japan. This conclusion lends support to the views of many academic scholars and policy experts that the estate tax should be repealed or reduced because it adds to the already-heavy U.S. tax burden on saving and investment and, by raising the cost of capital, impedes investment. |
