If you want to discuss incomes taxes and especially the AMT, that is, at best, a tangential issue.
Actually my intention was to simply say that class-warfare soak the rich policies that liberals make appeals to are misleading. They eventually end up hitting the middle class where the big money is, because of the size of the middle class.
What is wrong with it? It amounts to about $44 billion a year. Which helps. The foundations help break up concentrations of wealth. And the foundations are a major source of charity.
So what is the downside?
See below for arguments about the downside:
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Do the Wealthy Bear the Burden of the
Estate Tax?
The federal estate tax results in net tax liabilities
for a small number of estates each
year—typically between 1 and 2 percent of
estates in recent decades. Advocates of estate
taxation argue this makes the estate tax highly
progressive, allowing lawmakers to efficiently
redistribute wealth from rich to poor in society.
However, this logic is flawed. The assumption
that the full economic burden of the estate
tax falls only on wealthy estate owners is
inconsistent with both the economic theory of
tax incidence and empirical evidence on the
effects of estate taxes.
Economists teach that, in general, taxes do
not stay where lawmakers put them. Instead,
some portion of taxes are generally shifted onto
others. What economists call the “legal incidence”
of a tax—that is, the legal requirement
that certain individuals remit tax payments to
the government—is largely irrelevant to
understanding the economic effects of taxes.
What matters instead is which individuals bear
the true economic burden—what economists
call the “economic incidence” of taxes.
For example, corporations are legally
required to pay federal corporate income taxes
on their net income. However, although they
bear the legal incidence of the tax they do not
bear the economic incidence. Economists
widely agree that the ultimate burden of the
corporate income tax is borne by individuals,
not corporations. Some portion of the tax is
borne by shareholders of companies, but some
portion is also passed on to workers in the
form of lower wages, to consumers in the form
of higher prices, and to owners of other types
of capital throughout the economy in the form
of lower investment returns.
In the case of estate taxes, many advocates
of the tax argue that the economic burden of
the tax falls on wealthy estate holders. But this
is clearly incorrect. Estate holders may bear the
legal incidence of the estate tax, but the
economic incidence is partly shifted onto others
in society—many of whom are far from
wealthy.
Estate holders are able to shift part of the
burden of the estate tax to others through estate
planning and changes in behavior during life.
Because individuals are forward-looking during
life, those with large estates can respond to the
prospect of paying estate taxes long before
death. By adjusting consumption and savings
decisions during life, estate holders can pass on
the burden of estate taxes to others in ways that
are unintended by lawmakers.
One way estate holders shift the burden of
estate taxes onto others is by saving less during
life, thereby shrinking the size of taxable estates
upon death. Studies regularly find that, in fact,
estate taxes shrink the size of taxable estates by
encouraging consumption and discouraging
wealth accumulation.2 In this way, part of the
burden of estate taxes is shifted onto the heirs
of estates.
While it is commonly assumed that estate
heirs are as wealthy as decedents, studies show
this is often not the case. Harvard economist
N. Gregory Mankiw reports that the correlation
between lifetime earnings of successive
generations is between 0.4 and 0.5.3 That
suggests many estate heirs are much less
wealthy than decedents, making the estate tax
much less progressive than its supporters
believe it to be.
Also, wage and salary earners throughout
the economy bear some part of the economic
incidence of estate taxes. To see why, recall that
the estate tax is essentially a one-time excise tax
on assets accumulated throughout life. Because
the estate tax penalizes these savings, many
economists believe that it discourages estate
holders from saving during their working lives.4
If estate holders save less, the pool of capital
available in the economy for business investment
is smaller, resulting in fewer machines,
buildings and other technology that makes
workers more productive. Because wages in the
economy are primarily driven by productivity—
and productivity is driven by capital
investment, which is driven by the level of
savings—if the estate tax discourages savings it
will tend to make workers less productive, and
in turn, lead to lower wages.
Once the tax-shifting behavior of estate
holders is taken into account, the economic
incidence of the estate tax may be far less
progressive than is commonly assumed.
Wealthy estate holders my bear the legal
incidence of the tax, but the economic incidence
is borne by many other groups in society
who are adversely affected by the economic
distortions of the estate tax.
Do Estate Taxes Raise Revenue?
A second argument in favor of the estate tax is
that, despite its harmful economic effects, it
raises revenue for federal programs. However,
the estate tax has never been an important
federal revenue source. In recent decades it has
accounted for only 1 to 2 percent of federal
receipts, and many economists argue that even
this tiny figure may overstate estate tax revenues.
Substantial evidence suggests the estate
tax may actually raise zero or even negative
federal revenue once the full economic effects
of the tax are taken into account.
One reason the estate tax is a poor revenue
source is that it encourages widespread tax
avoidance. This avoidance in turn causes
“revenue leakage” in the tax system. During
life, wealthy estate holders face incentives to
engage in complex estate planning to avoid
estate taxation. This may include making gifts
to children in lower tax brackets, making taxdeductible
charitable gifts, or selling off assets
while living in order to pay the current maximum
15 percent capital gains tax rate rather
than the maximum 46 percent estate tax rate if
assets are held until death.
,..........
II. Economic Arguments Against the
Estate Tax
Over the years, economists have identified
many economic costs of the estate tax. Two of
the most harmful are outlined below: the estate
tax’s negative effect on entrepreneurship, and
the high costs of complying with the tax.
Estate Taxes Discourage Entrepreneurship
Previous Tax Foundation research has shown
the estate tax hurts the economy by discouraging
entrepreneurship. A 1994 study found that
the estate tax’s 55 percent rate at the time had
roughly the same disincentive effect as doubling
an entrepreneur’s top effective marginal income
tax rate.5 Thus, because of the estate tax an
entrepreneur facing a 31 percent statutory
income tax rate would behave as if he or she
were facing an effective 62 percent income
tax rate.
As the efffective tax rates facing entrepreneurs
rise, each hour of extra work is worth less
in terms of after-tax income. Under reasonable
economic assumptions, at some point the
threat of estate taxation causes entrepreneurs to
become more likely to retire early rather than continue to work.6 If the estate tax encourages
entrepreneurs to stop working and saving, not
only does this reduce federal income and
payroll tax revenue, but also results in less
overall wealth creation in the U.S. economy.
In a 2000 study, economists Joel Slemrod
and Wojciech Kopczuk measured the incentive
effect of the estate tax on wealth accumulation.7
Examining nearly a century of estate tax returns
between 1916 and 1996 they found a strong
negative relationship between estate tax rates
and the size of taxable estates, suggesting that
estate taxes discourage wealth accumulation.
Based on Slemrod and Kopczuk’s estimates,
Princeton University economist Harvey Rosen
calculates that overall wealth accumulation in
the U.S. economy would rise by 1.5 percent if
the estate tax were fully eliminated.8
High Compliance Burden of Estate Taxes
In addition to discouraging entrepreneurship
and wealth accumulation, the estate tax imposes
a staggering compliance burden on the
economy. Very wealthy estate holders may be
able to avoid some estate taxation through
complex tax planning, but doing so is costly
and economically wasteful. The estate tax also
imposes high compliance costs on many
individuals with smaller estates, as they are
forced to file complex estate tax returns despite
owing no net estate tax. These tax compliance
costs represent pure economic waste burned off
of the U.S. economy, on top of actual estate tax
revenues.
Economic studies have found that compliance
costs of the estate tax are much more
burdensome per dollar of revenue generated
than the federal income tax. One 1992 study
by economists Henry J. Aaron and Alicia H.
Munnell estimated the cost of complying with
estate taxes to be $1 for every dollar of revenue
raised—nearly five times more costly per dollar
of revenue than the notoriously complex federal
income tax. According to the authors of the
study, “[T]he ratio of excess burden to revenue
of wealth transfer taxes is among the highest of all taxes.”
Noting that this compliance burden
is largely the result of widespread tax avoidance,
Aaron and Munnell conclude that estate taxes
are effectively “penalties imposed on those who
neglect to plan ahead or who retain unskilled
estate planners” rather than actual taxes.9
A 2001 study from former Congressional
Budget Office director Douglas Holtz-Eakin
and Donald Marples found similarly high
excess burdens associated with the estate tax.
The authors estimate that the costs of
economic distortions caused by the estate tax
are equal to 26 percent of pre-retirement
savings, or $34 billion per year between 2001
and 2005.10
If these estimates are correct, the compliance
costs of the federal estate tax alone may
completely offset the revenue raised, likely
reducing economic welfare in the U.S. by a
large amount. For these reasons and for
reasons noted above, many economists argue
the federal estate tax is hard to justify on
either efficiency or equity grounds.
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