Some Thoughts on the Estate/Death Tax

Much is being made these days about the possible repeal of the Estate Tax to be debated in Congress this month.  The "talking points" on both extremes seem to be:

• For the Democrats:  Repealing the estate tax would cost a trillion dollars, and all that money will go to Paris Hilton.
• For the Republicans:  The estate tax is solely responsible for causing the wholesale destruction of the American Family Farm and your local Mom & Pop business.

So what's really at stake here?

First off, the whole "lose the family farm" argument is a non-starter.  Claims that Uncle Sam will take half of everything you own when you die are also just flat false, because several million dollars' worth of everything you own is exempt from estate taxes when you die.  Of course, for those with estates valued into the hundreds of millions, it is very nearly true.  In any event, the economic "devastation" caused by the so-called "death tax" is wildly exaggerated.

On the other hand, the $1 trillion expense figure is also wildly exaggerated.  Given that this is a 10-year estimate, that works out to $100 billion per year.  Yet the Congressional Budget Office report upon which various parties are resting their claims estimates that after the estate tax is fully reinstated in 2011, the estate and gift taxes combined will bring in only $40B, $43B, and $47B in 2012, 2013, and 2014 respectively.

Still, $47B is hardly chump-change.  That's a ton of dough... surely the Federal Government would feel the painful sting of losing that much revenue in the year 2014, right?  Especially given headlines such as "Estate Tax Repeal would be a federal budget buster".

The same CBO report estimates total federal revenues for 2014 of $3.629 trillion, which puts the $47B from the estate tax at... oh, let me grab my calculator...

Roughly 1.3% of projected revenues.

Er.... that doesn't really look like a budget-buster to me.

Of course, that's an overly simplistic analysis of budget impact.  Opponents of the repeal effort reasonably point out that with the government already running huge budget deficits, any decrease in revenues would necessitate a corresponding increase in borrowing, so the cost of repealing the estate tax must also take into account the cost of additional interest on the federal debt (typically estimated at about 50% of the total estimated reduced revenues for 10 years).

Those opponents, however, generally do not seem to be taking into account the separate findings of the CBO that a reduction in the estate tax, and corresponding anticipated reduction in charitable giving, would likely cause a magnified increase in income tax collections, possibly offsetting the lost estate tax revenue by up to 25%.

So what's the bottom line?

• Repealing the estate tax (or, more accurately, making the estate tax repeal permanent beyond 2010) will, in and of itself, cause a loss of revenue for the federal government.
• The lost revenue will be hardly noticable in the context of the overall federal budget.
• Family farms and small businesses are not likely to disappear if the tax is not repealed.
• And, Democrats seem to have an unnatural fixation on Paris Hilton.  Seriously, national tax policy (not to mention Constitutional Amendments, though that's a story for another blog) really shouldn't be based around a single personality, no matter how engaging or grotesque.

Comments

[Jen]

I agree that national tax policy should not center around one personality. I mean..what about Nikki Hilton? How would this affect her?

I'm sure there are plenty of republicans with unnatural fixations on Paris as well.