Tax Reform V: Eliminate the Estate Tax

The estate tax amounts to a penalty on the heirs of those who have accumulated wealth over their lifetimes.  It raises less than 1% of federal revenues, so it provides almost no benefit to anybody, but imposes a big cost on a few.

There are many ways for the wealthy to avoid the estate tax, so it collects little money from the really wealthy but can hit particular individuals hard.  The heirs of small business owners and family farmers who die unexpectedly, without having drawn up plans with their tax attorneys, will may have to liquidate the businesses to pay the taxes they owe.  The point is, it raises little revenue, it is easily avoided by those who are prepared, but it places a substantial burden on some.

From a fairness standpoint, the wealth people accumulate over their lifetimes comes to them as taxable income, so taxes have already been paid on those estates.  Arguing for the elimination of the estate tax is not arguing that estates should be untaxed, it is arguing that they should not be taxed twice.

The accounting and legal services the wealthy use to avoid the estate tax are not free, so there is some cost imposed on the economy to avoid the tax, and the provisions of the estate tax might also influence how individuals decide to bequeath their estates.  These people have earned their incomes, and they should have the right to distribute them as they prefer after they die, just as they have that right while they are still alive.

Why keep a tax that raises little revenue, has high compliance costs, and imposes substantial costs on a few Americans?

Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America .
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