Of Public Interest

Volume 1, Number 3
December 1999

Freedom from Death Taxes is Good for Everyone
by Richard E. Wagner

On 5 August 1999, Congress voted to repeal the federal death tax. Unfortunately for all Americans, the President vetoed this repeal on 23 September. To be sure, one might wonder why the President’s veto was unfortunate for everyone, as against being unfortunate for only a few. While the tax rate starts at 37 percent and rises to 55 percent, it kicks in only when a decedent’s estate reaches $650,000. The death tax would, on the surface, seem to be paid by only the well-off, and not by ordinary folks.

The belief that the death tax affects only rich folks is as wrong as is the ancient claim that the sun rises in the east and sets in the west. The first principle of taxation is that whatever is taxed will be supplied less fully by those who are taxed. Moreover, the higher the tax the more that supply will drop.

Death taxes are assessed against the wealth that people have accumulated during their lifetimes. Most of this wealth has been accumulated through the investment of savings in business enterprises of all kinds.

How much saving and investment takes place in a society depends on the return that people think they can secure for their efforts. Whatever that return might be, it will be reduced by death taxes. Higher death taxes mean that fewer new enterprises are created, and those that are created are generally supported with less capital than they would otherwise have been. Less capital to support enterprising activities means, in turn, that fewer new jobs are created. It also means that existing jobs will often pay less than otherwise, because increases in capital generally make workers more productive and, hence, better paid.

To be sure, there are many things that people can do to reduce their potential death tax. Estate planning has developed as a profession in good measure to help people reduce the bite from death taxes. But this should not make us feel any better about death taxes. According to a 1998 estimate of the Joint Economic Committee of Congress, the amount of money that people spend trying to navigate their way through death tax obstacles is roughly equal to the $23 billion of revenue that death taxes raise.

In truth, death taxes may actually raise no revenue at all. While the IRS may collect something like $23 billion from death tax filings, other tax revenues are depressed by the death tax. With fewer enterprises formed and fewer jobs created because of the death tax, personal income is lower. This means that fewer revenues will be collected from taxes on payrolls and personal income. Several studies have estimated that the reductions in these other sources of revenue are roughly equal to the amount of revenues attributed to the death tax. (A brief description of these studies can be found at www.house.gov/chriscox/deathtax/.) This means that the death tax collects no revenue for government, but simply substitutes one form of tax for another.

This substitution, however, comes at a high price. With less capital investment in enterprises, both new and old, the pace of economic progress is slowed and our competitive position in the international economy is weakened. We all suffer, compared to where we could have been had we abolished the death tax years ago. And we will continue to suffer in the future because of the President’s veto of death tax abolition.

Moreover, just think what message the President’s affirmation of death taxes sends to Americans. People become wealthy by investing their savings in business enterprises. Creativity, enterprise, and frugality are the traits of a progressive society. The death tax is a direct attack on those traits. By taxing enterprise and frugality, the death tax promotes prodigality. After all, glutinous expenditure on lavish consumption is a way of escaping the death tax. Such forms of escape, however, undermine the progressive character of our society and work to our detriment.

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