Time To End The Estate Tax

U.S. Senator Wayne Allard (R-CO)

This year, a consensus emerged in favor of significant tax reform. Congress passed and the president signed into law a comprehensive tax cut bill that eliminates the estate tax in 2010.

The only problem is the bill expires in 2011.

Permanent repeal of the estate tax is still needed to produce a fairer and flatter tax system. While it is important to focus on responding to the recent tragedies in our country, we should not lose sight of the need for policy reforms that will provide long-term stimulus for our economy and reflect America’s conviction that prosperity through hard work should be rewarded, not penalized.

Congress has levied estate taxes at various times throughout U.S. history, particularly during war. The current estate tax dates back to 1916, a time when many in Congress were looking for ways to redistribute some of the wealth held by a small number of super-rich families. This first permanent estate tax had a top rate of only 10 percent, and the threshold was high enough to ensure that the tax affected only a tiny fraction of the population. Like the rest of our tax code, it did not take long for this limited tax to evolve into a more substantial burden. In only the second year of the tax, the top rate was increased to 25 percent. By 1935 the top rate was 70 percent and in 1941 it reached an all time high of 77 percent.

The strongest argument that supporters of the estate tax make is that most American families will never have to pay an estate tax. While this is true, it does not justify retention of a tax that causes great harm to family businesses and farms, often constitutes double taxation, limits economic growth, consumes significant resources in unproductive tax compliance activities, and raises only a tiny portion of federal tax revenues. In other words, the estate tax is not worth all the trouble.

The estate tax can destroy a family business, farm or ranch. This is the most disturbing aspect of the tax. No American family should lose its business because of the estate tax. Current estimates are that more than 70 percent of family businesses do not survive the second generation, and 87 percent do not survive the third generation. While there are many reasons for these high numbers, the estate tax is certainly one of them.

More and more businesses are facing the prospect of closing their doors in order to pay the estate tax. One might expect that with all the economic dislocation associated with the estate tax that it raises a significant amount of revenue or accomplishes a redistributionist social policy. In fact, the revenue take is quite modest — less than 2 percent of federal revenue, or $27.7 billion in 1999.

A 1995 study published by the Rand Corporation found that for the very wealthiest Americans, only 7.5 percent of their wealth is attributable to inheritance – the other 92.5 percent is from earnings. America is a nation of tremendous economic opportunity. Success is determined principally through hard work and individual initiative.

Our tax policy should focus on encouraging greater initiative rather than on attempts to limit inherited wealth. The estate tax is a relic. It damages family businesses and farms, harms the economy, and constitutes double taxation. It is time for the estate tax to go.

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