Killing the Death Tax Would Resurrect Growth Because the tax reduces the stock of capital, it lowers the productivity of labor and reduces wages and employment. By Stephen J. Entin
http://www.wsj.com/articles/killing-the-death-tax-would-resurrect-growth-1476312875
The death tax is an inevitable point of disagreement in a presidential campaign. Donald Trump would eliminate it to promote growth. Hillary Clinton would raise it—up to 65%, while lowering the exemption for estates to $3.5 million—to promote equality. The outcomes would be as different as their intentions.
What’s less remarked upon is that estate taxes are always double taxation. Estates are built with savings that have already been taxed as income, or soon will be. Even contributions to tax-deferred retirement accounts will be subject to the heirs’ income taxes over time.
The superrich can afford to give away assets during their lives or hire estate planners to help minimize the tax. Their estates often wind up being taxed at a lower effective rate than those of merely affluent individuals. The main victims of the death tax are middle-income savers and small-business owners who die before transferring ownership to their children.
The estate tax is badly structured, with very high rates—up to 40% today—but a very narrow tax base. That’s why it produces so little revenue, only $19 billion last year. But because the tax has recoil effects, even this revenue is illusory.
Because the tax reduces the stock of capital, it lowers the productivity of labor and reduces wages and employment. Much of the burden of the tax is shifted to working people. Research suggests that the estate tax depresses wages and employment enough to actually lower total federal revenue over time.
So what about the plans offered by Mr. Trump and Mrs. Clinton? Analysts at the Tax Foundation, where I work, have run the numbers using two models: one of the estate tax, based on historical filings, and another to estimate the economic effects on capital formation, GDP, profits, wages and federal revenue from those sources.
Mr. Trump plans to eliminate the estate tax. As a partial offset, he would end step-up in basis—which currently excuses unrealized gains in an estate from capital gains tax—for estates over $10 million. Our models suggest that these changes would raise GDP by 0.7% over 10 years and create 142,000 full-time equivalent jobs. After-tax incomes for the bottom four-fifths of Americans would rise by 0.6% to 0.7%, mainly due to wage growth. For the top fifth of the population, after-tax incomes would rise between 0.9% and 1.7%.
The Treasury would lose $288 billion in estate-tax revenue over the 10-year budget window, assuming no effect on the economy, but only $46 billion after taking the rise in GDP, wages and other income into account. Revenue losses in the first six years would be almost entirely offset by gains later in the decade, with more gains thereafter. Both the public and the government would be net winners.
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