|Cato Policy Analysis No. 353||October 4, 1999|
by Edward J. McCaffery
Edward J. McCaffery is Maurice Jones, Jr., Professor of Law, University of Southern California Law School; visiting professor of law and economics, California Institute of Technology; and author of Taxing Women (University of Chicago Press, 1997).
The federal gift and estate tax has come to be known as the "death tax." There are several proposals to reform or repeal the tax pending before the current Congress, and at least some death tax changes are expected soon. Supporters of the tax continue to maintain, however, that the tax is necessary for the sake of fairness, clouding prospects for ultimate change.
This study is a primer on the basic issues surrounding the death tax. It finds that the tax fails to achieve most—and quite possibly any—of the objectives its supporters promote. The tax raises barely over 1 percent of total federal tax revenues, and when revenue losses from other tax sources are accounted for, its overall impact on tax receipts is smaller still. Studies indicate that for every dollar raised from the tax, roughly another dollar is lost because of avoidance, compliance, administrative, and enforcement costs. 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.
|Full Text of Policy Analysis No. 353 (PDF, 20 pgs, 119 Kb)|
© 1999 The Cato Institute
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