Cost and Consequences of the Federal Estate Tax

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REPUBLICANSTAFFSTUDY

CostandConsequencesoftheFederalEstateTaxAnUpdateJuly25,2012ExecutiveSummaryThisstudyconfirmsthatthecostoftheestatetaxfarexceedsanybenefitsitproduces. This study updates and extends two previous Joint EconomicCommittee studieson theestate tax, buildingon theseprevious studies toreflectupdateddataandlegislation.

The estate tax has reduced the amount of capital stock in theeconomyasdescribedinpreviousJointEconomicCommitteestudiesin 19981 and 2006.2 As of 2008, the estate tax has cumulativelyreducedtheamountofcapitalstockintheU.S.economybyroughly$1.1 trillion since its introduction as a permanent tax in 1916,equivalentto3.2percentofthetotalcapitalstock.

Theestatetaxisanoverwhelmingcauseofthedissolutionoffamilybusinesses. The estate tax is a significant hindrance toentrepreneurial activity because many family businesses lacksufficientliquidassetstopayestatetaxliabilities.

The estate tax does not reduce income and wealth inequality.Perversely, the estate tax creates a barrier to income and wealthmobility.

Economicinefficienciesduetothedistortionaryeffectsoftheestate

taxareburdensome,andthecostsofcomplianceassociatedwiththeestatetaxaddtothepaperworkandtimenecessarytocomplywithothertaxes.

The estate tax raises a negligible amount of revenue. Since its

inceptionnearly100yearsago, theestatetaxhasraised justunder$1.3trillionintotalrevenue;bycomparison,thatisequivalenttotheU.S.federaldeficitforfiscalyear2011alone.

Many studies have indicated that abolition of the estate taxwould

actuallyincreaseoverallfederaltaxrevenueinatleasttwoways:(1)the estate tax robs additional federal tax revenues from thecollection of other taxes like the income tax, and (2) a larger totalcapitalstockcouldincreaseincometaxrevenue.

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Contents

INTRODUCTION………………………2

OVERVIEWOFTHEFEDERALESTATETAX......................................2HistoricalandCurrentTaxRates...................................................3TaxableEstates..............................5InternationalComparisons........5

ARGUMENTSFORESTATETAXATIONAREWEAK...................6FederalRevenue............................6EstateTaxandInequality...........7IntergenerationalTransfersandWealthDistribution......................9WealthandIncomeMobility…10EstateTaxandCharitableContributions................................13

ARGUMENTSAGAINSTESTATETAXATION.......................................15EstateTaxReducesSavings,IncreasesConsumption.............15ReductionintheCapitalStockoftheEconomy..................................16TheEstateTaxRemainsaBurdentoFamilyBusiness......18

CONCLUSION.................................18

APPENDIX.......................................20EstateandGiftTaxRevenue,1916‐2010......................................20TableofEstateTaxRatesBefore,During,andAfterEGTRRA,1916‐2007......................................21

REFERENCES..................................22

JointEconomicCommitteeRepublicans|StaffStudy


Theartoftaxationconsistsinsopluckingthegooseastogetthemostfeatherswiththeleasthissing.

‐‐JeanBaptisteColbert,MinisterofFinancetoLouisXIVofFranceIntroductionAsalludedtobyJeanBaptisteColbert,effectivetaxationrequiresefficiencyto achieve the greatest amount of revenue, but at the least distortion ofoutput,employment,andgrowth.Andyet,theestatetaxfailsonbothcounts.The commentary will first review the federal estate tax and structure,examininghistoricaldataontheestateandgifttax,exemptions,andtaxableestates. Following that discussion, the focus will turn to addressing thecommonargumentsfortheestatetaxthatarenotvalid,particularlydelvinginto types of economic inequality that the estate tax exacerbates and itsadverse impact on wealth and income mobility. Prior to concluding, thecommentary will shift to arguments against estate taxation, detailing theeffectsoftheestatetaxonsavingsandconsumption,thecapitalstockoftheeconomy,anditsburdentofamilybusinesses.OverviewoftheFederalEstateTaxAccordingtotheInternalRevenueService(IRS),theestatetaxisataxonanindividual’srighttotransferpropertyathisorherdeath.Congressenactedtemporaryestatetaxestofinancemilitaryactivities(1797‐1802,1862‐1870,and1898‐1902).In1916,Congressmadetheestatetaxapermanentpartofthe federal tax system. Through the Tax Reform Act of 1976, Congressreshapedtheestatetaxintoitscurrentformthatprovidesaunifiedsystemtotaxalltypesofwealthtransfers.Thecurrent formof the federalestate tax includes: (1)a traditionalestatetax,(2)agifttax,and(3)ageneration‐skippingtransfer(GST)tax.Therearethreemajorestatetaxcreditsthatprovideadollar‐for‐dollaroffsetagainstanestate’sfederalestatetaxliability:(1)theunifiedtransfercredit,(2)thecreditforforeigndeathtaxes,and(3)thecreditforfederalestatetaxespaidbypreviousestates.Being cumulative in nature, the gift tax requires that all giftsmadeby thedecedentduringhisorherlifebeincludedinthevalueoftheestatefortaxpurposes. Atpresent,everydonormayexcludethe first$13,000($26,000per recipient from married couples) of cash or property given to eachrecipientannually.Firstenactedin1976andmodifiedbytheTaxReformActof1986,theGSTisimposedonoutrightgiftsandtransfersintrustforthebenefitofindividualstwoormoregenerationsyoungerthanthedecedent. TheGSTisaflat‐ratetaxsetatthetopestatetaxrate,35percentasof2012,witha$5.12millionexemption(indexedforinflationperindividualwhilelivingoratdeathanddoubledformarriedcouples).3Theestatetaxisintendedasatoolofredistribution,butgeneratestheleastamountoffederalrevenueofanysource,yieldingverylittletoredistribute.Rather,iftheestatetaxwereabolished,agreatmajorityoftransferswouldstillbesubjecttocapitalgainstaxationwhenassetsaresold,whichwouldinpartoffsetrevenuelossfromabolishmentoftheestatetax.4

Effectivetaxationrequiresefficiencytoachievethegreatestamountofrevenue,butattheleastdistortionofoutput,employment,andgrowth.Andyet,theestatetaxfailsonbothcounts.Theestatetaxisintendedasatoolofredistribution,butgeneratestheleastamountoffederalrevenueofanysource,yieldingverylittletoredistribute.



HistoricalandCurrentTaxRatesOver the past decade,the top estate tax rateand the size of theestate subject to taxhave varied. TheEconomic Growth andTax ReliefReconciliation Act of2001 (EGTRRA)gradually reduced thefederal estate taxthrough 2009 andabolishedit in2010asshowninTable1.Under EGTRRA, theestate tax would havebeen reinstatedwith atoprateof55percentplusafivepercentsurtaxontaxableestatesof$10.0millionto$17.2millionin2011.5However,CongressenactedTheTaxRelief,UnemploymentInsuranceReauthorization,andJobCreationActof2010(TRA2010) that replaced the full reinstatement of the estate tax and its pre‐EGTRRArateswithatwo‐yearreinstatementoftheestatetaxwith(1)a$5millionunifiedandindexedexemptionamount,(2)a35percentmaximumrate,(3)portabilityoftheexemptionamount,and(4)theoptionofapplyingEGTRRAtotheestatesofdecedentsin2010.6Decedentswhopassedawaybefore 2010, but whose estates did not file returns until fiscal year 2010comprisedthepaymentsin2010.7As shown in Table 1 above, the exemption amount for the estate tax hasbeenincreasedfrom$675,000in2001to$5millionin2011and2012.TheGSTtaxexemptionamounthasbeenraisedfrom$1.06millionin2001to$5million in 2011 and $5.12 million in 2012 as well. For gifts, the annualexclusionamounthasbeenadjustedforinflationsince2001andis$13,000in2012.i UnlessCongress acts to change the law, theestate tax rateswillrevertback to theirpre‐EGTRRA2001 levelsand theestate taxexemptionwillreturnto$1millionin2013.ii,8

i Note: For additional information on the historical detail of estate and gift taxrevenue,aswellas theestate tax including the initial taxrateand topbrackets indollarvalues,seetheAppendix.ii In all, the provisions scheduled to expire December 31, 2012 include (1) thereduction inmaximumestateandgift taxratesto35percent;(2)modificationstoreflect differences in credits resulting fromdifferent tax rates; (3) the increase ofestateandgifttaxexemptionto$5million;(4)“portability”rulesforthesurvivingspousetouseunusedexemptions;(5)thedeductionforstatedeathtaxespaid;(6)expansionandclarificationofestatetaxconservationeasementrules;(7)repealofthequalifiedfamily‐ownedbusinessdeduction;(8)modificationstothegeneration‐skipping transfer tax rule for certain transfers to trusts; and (9)modifications toestatetaxinstallmentpaymentrules.

EGTRRAgraduallyreducedthefederalestatetaxthrough2009andabolisheditin2010.UnlessCongressactstochangethelaw,theestatetaxrateswillrevertbacktotheirpre‐EGTRRA2001levelsandtheestatetaxexemptionwillreturnto$1millionin2013.

Table 1 – As a result of EGTRRA, the top estate and gifttax rates declined over time from 2001 to 2010 while theestate, gift, and GST tax exemptions increased. Ratesare expected to return to pre-EGTRRA levels in 2013.

2001 60%* $675,000 $1,060,000 $10,000

2002 50% $1,000,000 $1,100,000 $11,000

2003 49% $1,000,000 $1,120,000 $11,000

2004 48% $1,500,000 $1,500,000 $11,000

2005 47% $1,500,000 $1,500,000 $11,000

2006 46% $2,000,000 $2,000,000 $12,000

2007 45% $2,000,000 $2,000,000 $12,000

2008 45% $2,000,000 $2,000,000 $12,000

2009 45% $3,500,000 $3,500,000 $13,000

2010 $13,000

2011 35% $5,000,000 $5,000,000 $13,000

2012 35% $5,000,000 $5,120,000 $13,000

2013 & later 60%* $1,000,000 $1,360,000 $13,000

* Top rate is 55% & a 5% surtax for taxable estates of $10.0 million to $17.2 million.

‐‐ Estate and GST Taxes Repealed ‐‐

Table 1

Gift Tax

Exclusion

GST Tax

Exemption

Estate Tax

ExemptionFiscal Year

Top Estate &

Gift Tax Rates



According to the IRS, thenumberof estate tax returns filedhasdecreasedsteadilyfrom108,000in2001tofewerthan34,000in2009,primarilydueto increases in the filing threshold. In2009, the average tax rateon2009estate tax returns was 20 percent, and 44 percent of total returns weretaxable. For taxable returns valued at $20.0million ormore, the average

effective estate tax ratefellsignificantly. Basedonthesizeoftheestate,the percentage of totalreturnstaxablesteadilyincreased from 39percent for returnsvalued between $2millionand$3.5millionto 61 percent forreturns valued at $20millionormore.After accounting formarital and charitablebequest deductions, inaddition to expenses

anddebtsofestates,lessthanhalfofestates,44percent,filingin2009owedthe estate tax as shown in the category ‘All Taxable Returns’ in Figure 1above.9

From a historicalperspective, prior tothe 2000s, theexemption amount forthe estate tax haderodedwhenadjustingfor inflation; the $1million exemptionamount scheduledafter 2012 is justbelow the counterpartof 1916 in today’swealth (the exemptionwas$50,000for1916),see Figure 2. The lineis broken for the year2010,duringwhichtheestatetaxwasrepealed.10

TRA2010allowedexecutors, the individual(s)nominatedtoapportiontheestateassetsasrequested inthewill, tomakeachoiceto fileanestatetaxreturnunderthenewlaw,ortheycouldoptoutandtherecipientof thoseassetscouldinsteadpayunderadifferentsetoftaxeswhentheysoldthoseassets. Forheirswishingtooptout, theassetswouldnotbevaluedat thedateofdeath(knownasthe“steppedupbasis”),butbytheiroriginalvalue,andspousesweretheneligiblefor$3millionagainsttheappreciatedvalueof the assets when sold, and $1.3million for any other heir. It has been

Figure 1 – The average tax rate on estate tax returns iscompared to the percent of total returns that weretaxable in 2009.

In2009,theaveragetaxrateon2009estatetaxreturnswas20percent,and44percentoftotalreturnsweretaxable.The$1millionexemptionamountscheduledafter2012isjustbelowthecounterpartof1916intoday’swealth.

Figure 2 – The estate tax exemption, adjusted forinflation in 2010 dollars, is shown above from 1916 toexpected exemption level in 2013.



suggested that this creates a problem, however, for the executor whendecidingwhoistobenefitfromthe$1.3millioncredit.11

TaxableEstates

Asset distribution of taxable estates has changed over time as shown inFigure 3. The value of taxable estates is concentrated in publicly traded

stock, cash assets,state and local bonds,other real estate,closely‐held stock, andpersonal residences.12The remainingdistribution of assetsincludes categoriesdefined by the IRS,includingotherfederalbonds, insurance,private equity andhedge funds, limitedpartnerships, othernoncorporate businessassets, mortgages andnotes, retirement

assets,intangibles,art,andotherassets.

InternationalComparisons

TheUnitedStateshasoneofthehighesttopmarginalestatetaxratesintheworld.A2007reportdemonstratedthatapartfromSouthKoreaandJapan,both with 50 percentrates,theUnitedStatesboasted a 45 percenttax rate, the thirdhighest of the 50countries surveyed.13Exactly half of thecountriessurveyedhadnoinheritancetax,andthe remainingcountries (excludingthe United States)averaged a topmarginal estate taxrate of 23 percent—about half of the U.S.top marginal federalestatetaxrate.

Inaddition,unliketheUnitedStates,CanadaandMexicohavenoinheritancetax. Should the topmarginal estate and gift tax rates return to55percentwithafivepercentsurtaxin2013,thentheUnitedStateswillsoonrankfirstnotjustincorporatetaxation,butininheritancetaxesaswell.

Thevalueoftaxableestatesisconcentratedinpubliclytradedstock,cashassets,stateandlocalbonds,otherrealestate,closely‐heldstock,andpersonalresidence.Exactlyhalfofthecountries,surveyedbytheAmericanCouncilforCapitalFormation,hadnoinheritancetax,andtheremainingcountries(excludingtheUnitedStates)averagedatopmarginalestatetaxof23percent.

Figure 4 – Compared to the rest of the world, the UnitedStates bears one of the highest top marginalinheritance/estate tax rates as of 2007.

Figure 3 – The asset distribution of taxable estate taxreturns filed over the 2001-2010 period, indicating thatstocks held, while still a major asset, have declined.



ArgumentsforEstateTaxationAreWeak

FederalRevenue

The number of estate tax returns filed in 2011 fell 61.3 percent from theyearbeforeto11,128;in201028,780werefiled,another38.8percentdropcomparedtothe47,000filedin2009.14Infiscalyear2010,theIRScollectedanet $18.9 billion in estate and gift taxes representingonepercent of the2010 revenue total. For fiscal year 2011, the latest Congressional BudgetOffice (CBO) estimates indicate that estate and gift taxes produced $7.4

billion of federalrevenue—due in partto the 2010 repeal—and are expected toproduce a mere $11billion in 2012. In2011, estate and gifttax revenue willrepresent less thanone‐half percent oftotal federal revenueand 0.05 percent ofGDP(seeFigure5). Toput this in perspective,if the total estimatedfederal spending of$3.6 trillion in 2011

were averaged over one year, the amount of federal revenue raised fromestateandgifttaxeswouldcoverlessthanonedayoffederalspending.15

Historically, the estate and gift tax has never raised more thanapproximately$37billion in real2011dollarsof tax revenue in any givenyear despite the highest rates reaching 77 percent. Figure 6 belowdemonstrates that theestateandgifttaxratesare not correlatedwiththe amount of revenueraised.

Taxable returns from1916 to 2004 furtherdemonstrate that thenet estate tax revenue,which is the grossestate less deductions,hasrisenovertheyearsrelative to the grossestatetaxrevenue.16

The Joint Committeeon Taxation (JCT)estimatesthatpermanentrepealoftheestatetaxwouldlose$68billionoverthe2011‐2020periodasaresultofTRA2010,whichreducedthescheduledestateandgifttaxratespost‐2010.17However,theestimatedlossfromtherecentestatetaxchangesprojectedoverthenextdecadeisbaseduponstatic

Theamountoffederalrevenueraisedfromestateandgifttaxeswouldcoverlessthanonedayoffederalspending.Historically,theestateandgifttaxhasneverraisedmorethanapproximately$37billioninreal2011dollarsoftaxrevenueinanygivenyear.

Figure 5 – It is estimated that for fiscal year 2011, the estate and gift taxes will represent less than one halfpercent of total federal revenue.

Figure 6 – The top and initial estate and gift tax ratesare not correlated with the real estate and gift revenue,shown above adjusted for inflation.



analysis. While the JCT does account for some changes in taxpayerbehavior,suchassubstitutioneffectsthatwouldleadtothispotentialloss,itfails to account for the added revenue fromother formsof taxationof theresourcesthatformerlyfellundertheestateandgifttaxes,aswellasgreatercapital accumulation resulting in more economic activity and additionalcapital gains realizations. In a recent study by former Deputy AssistantSecretaryforEconomicPolicyattheDepartmentoftheTreasury,StephenJ.Entin, the increase inother federal government tax revenuewouldexceedthe revenue lost from repeal of the estate tax by $89 billion cumulativelythrough2021.18

EstateTaxandInequality

Supporters of the estate tax argue that because it only applies to the“wealthy,” it reduces income inequality. However, this assertion fails todistinguish between the different kinds of inequality and the reasons forthem.Italsolacksevidenceofmeaningfulreductionsininequality.

As theprior1998and2006 JECstudieshavedemonstrated, there isweakevidenceofacorrelationbetweenwealthand income. In fact, formerViceChairmanoftheFederalReserveBoard,AlanBlinder,foundthatonlyabouttwo percent of income inequality can be explained by inherited wealth.19Partofthereasonforthisresultisthelife‐cycleofincomeandsavings;whenworkersreachretirement,incomeplummetswhileassetlevelsremainhigh,andsomewealthyhouseholdsmayexperiencebusinessorcapitallossesthattemporarily place them at the bottom of the income distribution. Wealthtransfers byway of the inheritance tax have only a limited impact on thedistributionofearnings.

AnupdatedarticlefromtheFederalReserveBankofMinneapolis’QuarterlyReviewinFebruary2011foundthatmanylow‐incomehouseholdscontinuetoholdsubstantialamountsofwealth,andmanywealthyhouseholdshaveverylittleornegativeincome.20Thelatestdataconfirmthepriortrendsinearlier Federal Reserve Bank ofMinneapolis papers from 2002 and 1997.The recent paper breaks down types of inequality into three differentmeasurements,asdefinedbelow:earnings,income,andwealth.

Earnings:paymentstoalltypesoflabor.

Theearnings‐poorest,thebottom1percentofhouseholdsintermsofearnings,havenegativeearningsbutare in factwealthy,owningalmosttwicetheaveragewealth,puttingtheminthetoptenpercentofthewealthdistribution. Mostoftheirincome,79percent,comesfrom capital sources, and these households are older than theaverage,anddonothaveahighlevelofformaleducation.

Theearningspoor, thosewithinthebottomquintileofhouseholdsintermsofearnings,havenegativeearningsandarestillwealthybutsizablylesswealthythantheearnings‐poorest.Theysimilarlyhavelessformaleducationandthevastmajorityiscomposedofretirees.

Alternatively,mostoftheearnings‐richestbelongtothe46‐65agecategory (69 percent), the prime working years. Most havecompletedcollege(88percent)andnearlyhalfareself‐employed.

AccordingtoEntin,theincreaseinotherfederalgovernmenttaxrevenuewouldexceedtherevenuelostfromrepealoftheestatetaxby$89billioncumulativelythrough2021.Onlyabouttwopercentofincomeinequalitycanbeexplainedbyinheritedwealth,accordingtoBlinder.



Theearnings‐rich relymoreon labor incomeandlessonbusinessandcapitalsources.

Income:earningspluscapitalincomeandgovernmenttransfers.

The income‐poorest havenegative incomeand zero earnings, andyet they are wealthy; their negative income comes from bothbusiness (37 percent) and capital losses (106 percent), but theiraveragewealthwouldputtheminthesecond‐highestquintileofthewealth distribution. The income‐poorest are young, have failed tocompletetheireducation,andmanyhouseholdsareheadedbynon‐workersorbytheself‐employed.

The income‐poor have an average annual household income of$11,700 from transfers (60percent) and labor (36percent). Theyareeitheryoungorold(under31orover65).

The income‐richest gain most income from business and capitalsources,andmostareolderthan56.

Theincome‐richareslightlyyoungerwithanaverageageof50,andgetmoreincomefromlaborthanbusinessandcapitalresources.

Wealth:thevalueofallassets.

Thewealth‐poorest have an average net worth of ‐$79,000, buthave annual incomes of $40,000 on average,most ofwhich comesfromlabor.Theyaretypicallyyoungworkers(86percentunder45),college‐educated, and a third of their debt is from student loans,makinguphalfoftheirnegativenetworthposition.

Thewealth‐poorhaveaveragenetwealthholdingsof ‐$5,300,andmost income comes from labor (79 percent). The differencebetween the wealth‐poorest and wealth‐poor is education; a largeshareofthewealth‐poorconsistsofhighschooldropouts.

Thewealth‐richestgettheirincomeevenlysplitbetweenlaborandcapitalandbusinessresources,averageanageof59,andarehighlyeducated.

Thewealth‐rich getmost of their income from labor, average 58‐years‐old,andaconsiderableportionofthemhaveretired.

Indeed,inarecentstudyofCensusBureaudataexplainsamajorityofincomeinequalitybyhouseholddemographics.In2010alone,thereweresignificantlymoreincomeearnersperhouseholdinthetopincomequintileofhouseholds,at1.97,thanearnersperhouseholdinthebottomquintileofhouseholds,at0.43.Additionally,married‐couplehouseholdsrepresentedalargershareofthetopquintile,atjustover78percent,relativetosingle‐parentfamiliesorsingles.Thetopquintilehadthelargestshareoffull‐timeworkers,over77percent,while68percentofthoseinthebottomquintiledidnotwork.Familymembersinthetopincomequintilewerefivetimesmorelikelytohaveacollegedegreeand12timesmorelikelytohavefinishedhighschoolthanthoseinthebottomquintile.21

TheFederalReserveBankofMinneapolis’reportsthatthetopquintilehadthelargestshareoffull‐timeworkers,over77percent,while68percentofthoseinthebottomquintiledidnotwork.



IntergenerationalTransfersandWealthDistribution

Theestate tax is ineffectiveatdecreasing inequalitybecausemostwealthyhouseholds did not acquire their wealth through inheritances. As anexample, a look at Forbes’ 2011 list of the 400 richest people in America,measured by net worth, indicates that approximately 70 percent of therichestindividualsinAmericawere,infact,self‐made.22

According to the 2011U.S.Trust Survey, overthree quarters ofrespondentsiii (withwealth in excess of $3million) accumulatedtheir wealth throughearned income fromtheir occupations andinvestments; only 27percent accumulatedany part of theirwealth throughinheritance, as showninFigure7.23

Furthermore,empirical research from Kerwin Kofi Charles and Erik Hurst on thelikelihood that children of wealthy parents will also be wealthy hasdemonstrated that intergenerationalwealth transfershave little impactonthe distribution of income andwealth. When parental and child lifetimeincomesareaccountedfor,theestimatedelasticityfallsto0.18,meaning52percent of age‐adjusted elasticity can be explained by income. Lifetimeincome and ownership of certain assets account for nearly two‐thirds ofwealth elasticity, with the remainder influenced by a combination ofeducation, past parental transfers, and expected future bequests. CharlesandHurst further suggest that children’spropensity to save isdeterminedbyinheritanceofpreferencesexhibitedbytheirparents.24

Even for the richest households, inheritedwealth represents a very smallportionoftotalwealth.Accordingtoa2006studyfromtheNationalCenterforPolicyAnalysisexaminingwealth,inheritance,andtheestatetax,ifeverydollarresulting frominheritanceswastaxedaway, itwouldreducethetopone percent’s share of the nation’s total wealth by only four percentagepoints;ofthetopfivepercent,itwouldreducetheirshareofwealthbyonlysevenpercentagepoints.Furthermore,onlyoneinfivechildrenofwealthyfamilieswillberichthemselvesuponretirement,whilewellabovehalf the

iiiAccordingtothesurvey,asofSeptember2010,therewere“…approximately5.6millionhouseholdsintheU.S.withmorethan$1millionininvestableassets,including4.8millionwith$1M‐$4.99Mand782,000householdswithmorethan$5Mininvestableassets,ofwhichapproximately182,000havegreaterthan$10millionininvestableassets.”Oftherespondentstothesurvey,63percenthad$3‐5million,27percenthad$5‐10million,and10percenthadgreaterthan$10million.Theaverageageofrespondentswas61years,58percentofwhichweremenand42percentwerewomen;86percentweremarriedand81percenthadchildren.Inaddition,roughlyhalfhadtotalgross2010householdincomeoflessthan$250,000.

Figure 7 – In the 2011 U.S. Trust Survey, respondentsselected one or more wealth accumulation methods asa reason for their wealth.

AlookatForbes’2011listofthe400richestpeopleinAmerica,measuredbynetworth,indicatesthatapproximately70percentoftherichestindividualsinAmericawere,infact,self‐made.



childrenofparentsinthebottomhalfofthewealthdistributionwillendupinthetophalfbythetimetheyretire.25

According toa recentlyupdated study by PewCharitable Trusts, asshown in Figure 8,more than four out offive Americans havehigher absolute familyincomes today thantheir own parents hadapproximately30yearsago, and children bornto parents in thebottom quintile aremore likely to surpasstheir parents’ incomethan children fromanyotherquintile.26

RecentresearchsuggeststhatSocialSecurityhasasignificantnegativeeffectonthedistributionofwealth. TheguaranteeofSocialSecuritydiscouragesthesavingsoflower‐andmiddle‐incomehouseholdsforretirement. Thesehouseholds have generally relied upon Social Security in place of or as alargesupplementtoretirementsavings,andasaresult,havelittletonothingtoleavetheirchildren,asSocialSecuritybenefitsarenontransferable.Thus,without Social Security, enabling intergenerational transfers withouttaxation would have an equalizing effect on wealth. According to theaforementioned 2006 study from the National Center for Policy Analysis,absent the Social Security program, increased bequests would actuallyreducewealthinequality,suchthatthetopfivepercentofhouseholdswouldholdonly46percentoftotalwealthratherthan51percent.27

WealthandIncomeMobility

There are many factors affecting the distribution of income and wealthamongU.S.householdsovertime.Withoutanaccurateandcomprehensivepicture of income and wealth mobility over time, a snapshot of thedistributionofincomeandwealthatanyparticularmomentmayactuallybequite misleading. As elaborated by James Pethokoukis, the CBO’s recentanalysis of income inequality is limited, and reasons why the incomeinequalitypictureissodifficulttomeasureinclude:28

(1) the wealthiest and poorest individuals change constantly overtime;

(2) realmedianafter‐tax incomegrewby35percentover thepastthreedecades;

(3) households in the top income quintile have nearly five timesmorefamilymembersworkingonaveragethanthelowestquintile;

(4) technological change has rewarded workers that have moreeducationandskills;

Figure 8 – The percent of the children with family income above their parents by parents’ income ranking shows that 84 percent of all children will achieve income above that of their parents.

Childrenborntoparentsinthebottomquintilearemorelikelytosurpasstheirparents’incomethanchildrenfromanyotherquintile.Withoutanaccurateandcomprehensivepictureofincomeandwealthmobilityovertime,asnapshotofthedistributionofincomeandwealthatanyparticularmomentmayactuallybequitemisleading.



(5) prices paid by the rich have been increasing faster than pricespaidbythepoor,thusasinglecommonpriceindexacrossallincomegroupsoverstatesreal incomegrowthat the topandunderstates itatthebottom;29and

(6) as the CBO has mentioned, “…changes in the governance andstructure of executive compensation, increases in firms’ size andcomplexity,andtheincreasingscaleoffinancial‐sectoractivities”aspossibleinfluencesaswell.

Thedifferentreasonsforwealthandincomeinequalitycallintoquestionthejustification as well as the likely efficacy of government redistributionefforts.

Asreportedintheearlier2006JECpaper,foreverypersonwhoremainsinthesamewealthquintileastheirparents,twoorthreechangetoadifferentquintile.Furtherresearchrevealsthatacrossanygiventimeperiod,thereissignificantmovementwithinone’slifetimebetweenquintiles.

According to a recentreport from the U.S.Treasury,from1996to2005, 58 percent ofhouseholds havemoved up to a higherincome quintile.Likewise,57percentofthe top one percent oftaxpayersmoveddownone or more incomegroups over the sameperiod as shown inFigure 9. According totheTreasury:

The degree ofrelative incomemobility amongincome groups overthe 1996 to 2005period is verysimilar to that overthe prior decade(1987to1996).Tothe extent thatincreasing incomeinequality widenedincome gaps, thiswas offset byincreased absolute income mobility so that relative incomemobility has neither increased nor decreased over the past 20years.30

Inaddition,a report fromtheTaxFoundationhas foundsimilarresultsonthe incomemobility issuebyusing recent IRSdataspanning from1999 to

Thedifferentreasonsforwealthandincomeinequalitycallintoquestionthejustificationaswellasthelikelyefficacyofgovernmentredistributionefforts.

From1996to2005,58percentofhouseholdshavemoveduptoahigherincomequintile.Likewise,57percentofthetoponepercentoftaxpayersmoveddownoneormorequintilesoverthesameperiod.

Figure 9 – Above: Movement to a higher incomequintile from 1996 to 2005. Below: Movement to a lowerincome group from the top 10, 5, and 1 percent(s).



2007,identifyingthatapproximately60percentofhouseholdsthatwereinthe lowest incomequintile in 1999were in a higher quintile in 2007, andanotherapproximate40percentofhouseholdsinthetopquintilefellatleastonequintileoverthesamenine‐yearperiod.31

TheFederalReserveBankofMinneapolishasalsouseddatatodemonstrateearningsmobilityofU.S.householdsusingincomedatafromthePanelStudyofIncomeDynamicsthatfollowedthesamehouseholdsfrom2001to2007.The empirical results demonstrate that 44 percent of the lowest quintilemoved up at least one quintile by 2007, and 34 percent in the highestquintilemoveddownat leastonequintileover thesame timeperiod. Inaddition, when taking into account household size and differing priceindexes,medianhousehold income formosthousehold types increasedbysomewherebetween44percentto62percentfrom1976to2006.32Medianhourlywages, including fringebenefits,also increased28percentbetween1975and2005.33

InanotherexaminationofIRSdata,the400highestearningtaxreturnsfiledbetween1992and2008includedonlyfourpeoplewhoappearedinthetop400 filers continuously; however, one‐timers abounded: 39 percent of thetop400filersappearedinthatcategoryonlyonceoverthe17‐yearperiod.34According to a paper published with the National Bureau of EconomicResearchbyauthorsEmmanuelSaezandWojciechKopczuk, the shocksoftheGreatDepression,theNewDeal,andWorldWarIIradicallyreducedtheshareofwealthheldby the topof thewealthdistribution. Theprominentroleofstocksandrealestateportfoliosonwealthhasasignificanteffectonthenumber of estateswith sufficient assets to be considered taxablewiththeestatetax. Assuch, thoseat thetopof thewealthdistributionarealsoexposed to the greatest volatility in wealth. Between March 2007 andFebruary 2009, the S&P 500 index lost 48.3 percent of its value, and thevalueofsingle‐familyhomesfellbyanaverageof23.6percentoverasimilartimeframe.35InrecentresearchfromtheFederalReserveusingthecross‐sectionalSurveyofConsumerFinances, among thewealthiestonepercentofhouseholds in2007,33percentfellfromthatgroupby2009;amonghouseholdsinthetoponepercentofincomein2007,43percentfellfromthathighestcategoryby2009.36 Indeed, in the wake of the recent recession, the number ofindividualsmakingamilliondollarsormorefellby40percentto236,883,andtheircombinedincomesfellbynearly50percent. Inthe1990‐91and2001 recessions, the richest five percent of Americans experienced thelargestdeclinesinwealth.Bycontrast,theeffectwasmuchbroaderin2009,withtherichest20percentencounteringthegreatestlossinaveragewealthofanyotherquintile.Forallthreerecessions,thetoponepercentofearnersexperienced the largest income shocks in percentage terms of any U.S.incomegroup,andthemeasuredgapbetweenthetopandbottomquintilesshrankduringrecessions.37

Medianhouseholdincomeformosthouseholdtypesincreasedbysomewherebetween44percentto62percentfrom1976to2006,accordingtotheFederalReserveBankofMinneapolis.AccordingtotheFederalReserve,amongthewealthiestonepercentofhouseholdsin2007,33percentfellfromthatgroupby2009;amonghouseholdsinthetoponepercentofincomein2007,43percentfellfromthathighestcategoryby2009.



As a measure ofadjusted gross income(AGI), shown in Figure10,theincomeshareofthe top one percent inthe United States fellfromnearly25percentin 2007 to 17 percentin 2009. The incomeshare of the top 0.1percent experienced adrop from just over 12percent to eightpercent of the incomeearned in 2009, thelowestithasbeensince2003.38 The recent

spikesshowninFigure10inthelate1990sandthroughthe2000ssimilarlydemonstratetheaftermathofthetechandhousingbubbles,respectively.

Asameasureoftotalwealth,sincetheGreatDepression,topwealthshareshaveincreasedonlymodestlyduringthestockmarketboomsof the1960sand 1990s. Prior to the Depression, the top one percent held 35 to 40percentoftotalwealthintheUnitedStates,butoverthelastthreedecadesleadingupto2000thatsharehasdeclinedtobetween20and25percent.39In 2009, Kopczuk restated there was no compelling evidence that wealthconcentrationhasmuchchangedsincetheearly1980s.40

ThefederalefforttolevelwealthandincomeinAmericaisofdubiousvalueand,inanycase,devoidofmaterialeffect,giventhepredominantreasonsforinequality,thepopulation’shighdegreeofwealthandincomemobility,andthe independently occurring reduction in wealth concentration associatedwithrecessions.

EstateTaxandCharitableContributions

Wealthy individuals generally consider charitable contributions to be animportantuseofwealth—agoalwhichcanbe significantly affectedby theestatetax.AccordingtotheIRS,from2001to2007,charitablecontributionsreported on estate tax returnswere the second largest tax deduction, justbehind bequests to a surviving spouse.41 According to the JCT, charitablegivingbyindividuals,foundations,estates,andcorporationstotaled$290.89billion in2010,ofwhich$22.83billionwasgivenbyestates,wellover thetotalamountofestatetaxrevenuecollectedforthatyear.42

Accordingtothe2011U.S.TrustSurvey,regardingthewaythatrespondentswanted to use their wealth, 36 percent of respondents said making apositiveimpactonsocietyand13percentsaidthatleavingalastinglegacyofcontribution to society are important goals. In addition, three‐fourths ofrespondents answered that there is growing animosity in the countrytoward wealth, and two‐thirds agree that there is an economic benefit ofwealththatisultimatelybeneficialtosociety.43

Figure 10 – The top one percent’s share of adjustedgross income (AGI) demonstrates that the wealthy held17 percent of AGI in 2009, similar to that of 1913.

TheincomeshareofthetoponepercentintheUnitedStatesfellfromnearly25percentin2007to17percentin2009,asdemonstratedbyauthorsPikettyandSaez.AccordingtotheIRS,from2001to2007,charitablecontributionsreportedonestatetaxreturnswerethesecondlargesttaxdeduction,justbehindbequeststoasurvivingspouse.



Using data from theIRS, it is possible toidentify thatapproximately 19percent of all estates(justover21percentoftaxable estates, shownin red in Figure 11)claimed a charitablebequest deduction,totaling $16 billion in2009, averaging $2.7millionforallestatesasshown in blue. This isconsistent with theformerly reported 18.5percentof returns filed

in2004asmentionedinthe2006JECpaper.Ofthosein2009,estateswith$20millionormore ingrossestateaccountedformorethan58percentofthischaritablebequesttotaldespitecomprisingonly3percentofestatetaxfilers.44

The common objection that elimination of the estate taxwould negativelyimpact charitable giving because of the provisions in the estate tax thatallow for charitable bequests ismisleading becauseprovisionsof allowingdeductions for charitable giving in the individual income tax codeprovidegreater incentive to give to charities during life rather than in death. Agreater percentage, 36 percent of total taxable households nationwide,itemizedcharitablecontributionsonindividualincometaxreturns,totaling$158billion.45

IRS data has also contradicted expert forecasts from the early 2000s thatclaimedcharitablecontributionswoulddropbetween22and37percent ifthefederalestatetaxwererepealed.Thedatahassincerevealedthatevenas the exemption continued to climb in the2000s leadingup to estate taxrepeal for the year 2010, inflation‐adjusted charitable contributionsremainedsteadyforcharitiesandevenincreasedforprivatefoundations.46

In 2004, the CBOacknowledged thatreducingtheestatetaxby exempting morewealth from the taxhas two conflictingeffects: (1) by raisingafter‐tax wealth,individuals may bemore inclined to giveto charity, and (2)individuals newlyexempt from the taxmay have lessincentive to give andtherefore reduce their

Figure 11 – The average charitable bequests on all estate tax returns follows closely with the averagecharitable bequests of taxable estate tax returns.

Approximately19percentofallestatesclaimedacharitablebequestdeduction,totaling$16billionin2009,averaging$2.7millionforallestates.Provisionsofallowingdeductionsforcharitablegivingintheindividualincometaxcodeprovidegreaterincentivetogivetocharitiesduringliferatherthanindeath.

Figure 12 – As reported in a recent survey, wealthygivers identified if they planned to change theircharitable contributions if the estate tax were repealed.



charitablegiving.47

Whilethereportestimatesthattherepealoftheestatetaxwouldnegativelyaffect charitable contributions, assuming the latter would outweigh theformer incentive, tax uncertainty has also negatively affected charitablegiving, as reportedby a recent survey from theCenter onPhilanthropy atIndianaUniversity,whichdetermined thatwealthy givershavebeenmoresensitive to the impact of tax policy on their contributions than theyhavebeen in the past. In fact, as shown in Figure 12 on the previous page, in2009, wealthy households reported that if the estate tax were repealed,nearly48percentofhighnetworthhouseholdswouldleaveunchangedtheamount they leave to charity,while 43percent reported theywould leavemoretocharityiftheestatetaxwererepealed.48

ArgumentsAgainstEstateTaxation

Inaddition, theestate taxcannotbeassessedcompletely isolated fromtheeffectsandinfluencesofgovernmentprogramsandotherformsoftaxation.As taxesare interactive,whenCongresschangesone tax, it canchange therevenue flows of other taxes. As highlighted by the Tax Foundation, theestate tax robs the income tax several ways: (1) by imposing wastefulcompliancecostson taxpayersand the IRS; (2)byshelteringsome incomefrom taxation through deductions for tax planning; and (3) by shiftingwealthintononprofitsthatpaynotax.49WilliamAhernwrites:

For example, consider a $100 million charitable gift madeshortlybeforedeathin2009toavoidpayingabout$40millionin estate tax. The charity could be the National RifleAssociation or Handgun Control, the Catholic Church orPlannedParenthood.Ifthecharityinveststhegift,itwillearnabout $8 million annually, tax‐free. …[in 2010], thanks toestatetaxrepeal,peoplelikeDuncan,Steinbrenner,andKlugearemore likelyto leavetheirassetsinthehandsoftaxpayingpeople, probably their spouses and children, who continueearningtaxable income. Whentheheirsearnthat$8million,itwon'tbetax‐free;they'llpayabout$3milliontoUncleSam.…if they reinvest the balance, 10 years of tax paymentswillexceed$40million. After20years, the income taxpaymentswouldexceed$100million.50

Basedon this example, the federal government actually achievesmore taxrevenue from thepermanent repealof theestate tax thanbykeeping it inplace.Thiswouldalsoboosttaxrevenuebyreducingtheneedforadditionaltaxplanning,whichisnotonlyexpensiveandtimeconsuming,butalsotaxdeductible.

EstateTaxReducesSavings,IncreasesConsumption

Theestatetaximpedeseconomicgrowthbecauseitdiscouragessavingsandcapital accumulation. Even themeager$19billion that the estate andgifttax raised in 2010 and the even smaller $7 billion in 2011 are overstatedbecausetheyfailtotakeintoaccounttheincometaxlossesthatresultfromestate tax avoidance. The estate tax motivates wealth holders to reducesavings and increase consumption, thus increasing the inequality ofconsumption. Thus,when facedwith a potential 55 percentmarginal tax

Theestatetaximpedeseconomicgrowthbecauseitdiscouragessavingsandcapitalaccumulation.Whenfacedwithapotential55percentmarginaltaxrate,itcosts$2.22foradecedenttogiveabeneficent$1ofpre‐taxassetsasaresultofestateandgifttaxes.



rate,itcosts$2.22foradecedenttogivea$1ofpre‐taxassetsasaresultofestate and gift taxes, whereas the decedents could instead consumesignificantlymoreofthat$2.22forpersonalbenefit.

As economist and professor Ed McCaffery explains, “Another commonargumentisthatthetaxhitsonlyasmallfractionofthepopulation.Butthatfractionpullsadisproportionateamountofeconomicweightwhenitcomesto savings. …the right way to deal with the general problem of U.S. taxpolicy—totaxspending,notworkingandsaving.”51

Rather, inheritances may decrease inequality because they redistributeincome within families and thus decrease inequality in lifetimeconsumption.Thesereasonshavebeenechoedinseveralstudiesexaminingtheeffectofwealthtransfersoninequality.

Increased investment by entrepreneurs increases capital stock andwages.Examining the effects of abolishing the estate tax on business investment,borrowing constraints, estate transmission, and wealth inequality, CagettiandDeNardi determined that repeal of the estate taxwouldnot generatelarge increases in inequality, but would instead, in some cases, increaseaggregateoutputbyasmuchas1.5percentandcapitalaccumulationby2.5percent.About80percentoftheyoungand90percentoftheelderlywouldexperiencearesultant0.2percentincreaseinyearlyconsumption.Further,if the revenue shortfall was financed through increased income orconsumption taxation, the cost of the tax burden would fall on the vastmajority of the population (of 1 percent of yearly consumption at most)whiletherichandelderlywouldexperiencewelfaregains(ofapproximately6percentofyearlyconsumption).52

ReductionintheCapitalStockoftheEconomy

As aforementioned, the estate tax lowers federal income tax revenue bymotivatingindividualstoreducesavingandincreaseconsumption,therebyreducing the amount of capital stock in the economy. Prior researchdemonstrates that estate taxes can inhibit the size of reported taxableestates. Furthermore, followingsignificantestate taxrate increases,estatetaxrevenueasashareofGDPhasbeenshowntodecrease,andalternatively,increaseasashareofGDPwhentheestatetaxrateissignificantlylowered.The resultant loss of capital from the estate tax could be servingeconomicallyproductiveuses;butasitis,thelosstranslatesintolesswealthand reduced economic activity, thus leading to a smaller tax base for theincometax.53

AsinitiallydemonstratedinthefirstJECstudyonthesubjectofestatetaxesin1998, if it is assumed that estate tax revenues represent resources thatwouldotherwisehavebeen left in thestockof capital (which isdefined inthiscaseastotalprivatefixedassetsexcludingconsumerdurablegoods),itispossible todeterminehowmuchgreater the totalstockofcapitalwouldbeintheabsenceoftheestatetax.

The initial 1998 JEC study makes use of a formula derived from a 1988academic paper54 by Laurence J. Kotlikoff and Lawrence H. Summers inwhich they define the long‐run steady‐state equilibrium stock of capital.Fromthere,theauthorsdeterminedtheaccumulatedstockofwealththatisderived from total intergenerational transfers over time by defining the

AccordingtoauthorsCagettiandDeNardi,repealoftheestatetaxwouldnotgeneratelargeincreasesininequality,butwouldinstead,insomecases,increaseaggregateoutputbyasmuchas1.5percentandcapitalaccumulationby2.5percent.Theresultantlossofcapitalfromtheestatetaxcouldbeotherwiseservingeconomicallyproductiveuses.



magnitudeofthewealtheffectbasedonseveralfactorsincludingtheafter‐tax interest rate, the population growth rate, the age at death, the age atwhichthetransferismadetotherecipient,andtheageoftherecipientwhenthe transfer is made. This provides enough information to estimate theannualintergenerationalflowofcapital insteady‐stateequilibrium,aswellas measurement of lost intergenerational transfers over a long period oftime. This figure canbe interpretedas the total reduction in capital stockresultingfromtheestatetaxsinceitsinceptionin1916.

As noted in the 1998 JEC paper, and again in 2006, itwas estimated howmuchlargertheannualflowofintergenerationaltransferswouldhavebeenintheabsenceoftheestatetax.ivUsingdatafrom1995,thepaperconcludedthat the estate tax represented at least 5.9 percent of annualintergenerationalflows.Increasingthe1995inferredflowofcapitalby5.9percent yields an increase in the 1995 stock of privately‐owned capital of$497billion,equivalentto3.2percentofthe$15.7trilliontotalstockintheeconomy. In 2006, the figurewasupdated to showa loss of $847billion,equalto3.8percentofthetotalcapitalstock.

According to the latestfigures(showninTable2 above), as of 2008,theaccumulatedcapitalloss since 1916 as aresult of the estate taxis approximately $1.1trillion, representing3.2 percent of the totalstock of capital in theeconomy. This is

nearly the total cumulativeestate tax revenuesince1916—theyearof theestatetax’sinception—$1.2trillioninreal2008dollars.v

AccordingtodataanalysiscompletedbyformerCBODirectorDouglasHoltz‐EakinandCameronSmith,aftertheyear2010,settingtheestatetaxratetoequalcapitalgainstaxationof15percentraisesthecostofcapitalbyeightbasispoints. Letting the topmarginal estate tax rate return to60percent(the 55 percent rate prior to EGTRRA including the five percent surtax)wouldincreasethecostofcapitalbyapproximately35basispoints.Duetohighercapitalcosts,whichreduceincentivestoinvestandimpedetheabilityoffirmstogrowandcreatejobs,capitaloutlaysbyfamilybusinesseswouldfallbybetweentwoandninepercentinresponsetohigherestatetaxrates.Inaddition,lettingtherateriseashighas55or60percentwoulddecreasetheprobabilityofnewhiringby31or33percentandcutthesizeofpayrollsby nine or ten percent, respectively. According toHoltz‐Eakin and Smith,lettingtheestatetaxriseto60percentwouldpotentiallycostasmuchas1.5million jobs over a planning period of 20 years, and a modest rate of 15percentcouldstillslowhiringbyover350,000jobsoverthesameperiod.55

ivTheformulasanddatasuppliedbyKotlikoffandSummersindicateinthelongrun,a$1increaseinannualtransfersresultsin$38.67inadditionalcapital.vTheyear2008wasusedtolargelyavoidtheeffectsoftherecentrecession,whichcanbeseentosomeextentinthe2009and2010figuresforthetotalcapitalstockintheeconomy.

Data Cap. Acc. Loss

$Bil, Nominal % $Bil, Nominal

1995 $497 3.20% $15,700

2001 $847 3.80% $22,500

2008 $1,115 3.20% $34,900Source: Haver.

Stock of Capital in Economy

Table 2

Table 2 – A compilation of the results from the currentand former JEC studies examining the accumulatedloss of stock of capital in the economy as a result ofthe estate tax.

Asof2008,theaccumulatedcapitallossasaresultoftheestatetaxisapproximately$1.1trillion,representing3.2percentofthetotalstockofcapitalintheeconomy.



In addition to lowering the capital stock and slowing capital formation,economist Joseph Stiglitz has argued the estate tax essentially raises thereturn on existing capital because it becomes more difficult for others toaccumulate wealth, thusmaking the rich richer since thewealthy alreadyownmostoftheexistingcapital.Evenwiththecapital‐laborratioremainingunchanged—which, according to Stiglitz, is necessary to evaluate theincidence of a tax in a growth context—the estate tax may increaseinequalityinthedistributionofconsumption.56

TheEstateTaxRemainsaBurdentoFamilyBusiness

Theestatetaxistheoverwhelmingcauseofdissolutionoffamilybusinessesbecausethesebusinessesare less likelytohavetheresourcesnecessarytomeetestatetaxliabilities.Hence,theestatetaxisasignificanthindrancetoentrepreneurial activity. The Tax Foundation produced a study whichestimated a compliance cost of $88.2 million and 2.3 million hours ofcomplianceeffortforestatetaxesintheyear2005.Thegifttaxrequiredanadditional$66.0millionand1.7millionhourstocomply.57

For estates exceedingat least $5 million invalue, the effective taxburden is only 13.5 to17percent.58However,according to the CBO,approximately 5percent of all estatesthat owed estate taxesin2000(thelatestdataavailable) had a taxliability that exceededtheir liquid assets (i.e.bonds, corporatestock,bank accounts, andinsurance); for estatesof farmers, the figurewas 8 percent, and for

family‐ownedbusinesses,thefigurewasevengreater,atmorethanathird.59Farmassetsandbusinessassetsrepresent17.1percentofthegrosstaxableestate value as of 2009, the third largest category following stock (30percent)andrealestate(22percent),asshowninFigure13.

Conclusion

There are extensive costs associated with the estate tax in terms of thedissolutionoffamilybusinesses,slowergrowthofthecapitalstock,andtheresulting loss of output and income over time. If the estate tax actuallyprovided benefits, such as raising a significant amount of revenue orreducinginequality,theestatetaxmightbejustified,buttheestatetaxdoesnot.Perversely,theestatetaxactuallycreatesanimpedimenttoincomeandwealth mobility. Moreover, the estate tax may actually reduce aggregatefederaltaxrevenuebyreducingthecollectionsfromotherfederaltaxes.

Uncertainty over the future course of taxation contributes to the subparrecovery from the December 2007‐June 2009 recession. Respondents to

Figure 13 – Assets as a percent of gross estate in filing year 2009; stock remains the largest share, followed byreal estate, farm & business assets, bonds, cash, andpensions.

TheTaxFoundationproducedastudywhichestimatedacompliancecostof$88.2millionand2.3millionhoursofcomplianceeffortforestatetaxesintheyear2005.

Perversely,theestatetaxactuallycreatesanimpedimenttoincomeandwealthmobility.



the2011U.S.TrustSurveyconveyedsignificantuncertaintyandworryoverthefuturepathoftaxationontheirassets.Whilerespondentswerevirtuallyunanimous about feeling they have a good understanding of their risktoleranceandthattheirrisktoleranceisaccuratelyreflectedintheircurrentasset allocation, there remained reportedly much less confidence whendetermining whether that asset allocation is structured to minimize theimpact of taxes. Furthermore, while 96 percent of respondents reportedthat they were wealthier than their parents, nearly half the respondentsbelieved that it is unlikely their children, the next generation’s heirs, willachieve a level of wealth that is equal to or higher than what they haveexperienced.60

The estate tax accomplishes little at great economic cost. Policymakersshould consider reforming the estate tax to lessen its adverse effects orrepealingitaltogether.

Theestatetaxaccomplisheslittleatgreateconomiccost.Policymakersshouldconsiderreformingtheestatetaxtolessenitsadverseeffectsorrepealingitaltogether.



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17“EstimatedBudgetEffectsofthe‘TaxRelief,UnemploymentInsuranceReauthorization,andJobCreationActof2010,’”2010;seealso:“CBOEstimateofChangesinRevenuesandDirectSpendingforS.A.4753,anamendmenttoH.R.4853,theTaxRelief,UnemploymentInsuranceReauthorization,andJobCreationActof2010,”CongressionalBudgetOffice,December10,2010,http://www.cbo.gov/ftpdocs/120xx/doc12020/sa4753.pdf.

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29RobertJ.Gordon,“MisperceptionsabouttheMagnitudeandTimingofChangesinAmericanIncomeInequality,”WorkingPaper15351,NationalBureauofEconomicResearch,September2009,http://www.nber.org/papers/w15351.pdf. 30“IncomeMobilityintheU.S.from1996to2005,”ReportoftheDepartmentoftheTreasury,November13,2007,http://www.treasury.gov/resource‐center/tax‐policy/Documents/incomemobilitystudy03‐08revise.pdf.

31RobertCarroll,“IncomeMobilityandthePersistenceofMillionaires,1999to2007,”SpecialReportNo.180,TaxFoundation,June2010,http://www.taxfoundation.org/files/sr180.pdf.

32TerryJ.Fitzgerald,“WhereHasAlltheIncomeGone?”TheRegion,TheFederalReserveBankofMinneapolis,September1,2008,http://www.minneapolisfed.org/pubs/region/08‐09/income.pdf.33TerryJ.Fitzgerald,“HasMiddleAmericaStagnated?”TheRegion,TheFederalReserveBankofMinneapolis,September1,2007,http://www.minneapolisfed.org/pubs/region/07‐09/wages.pdf.34“DebunkingtheObama‐BuffettMythonTaxes,”RepublicanStaffCommentary,JointEconomicCommittee,September28,2011,http://jec.senate.gov/republicans/public/?a=Files.Serve&File_id=47934277‐72c5‐4933‐9e4a‐72ae8c9085f235BrianG.Raub,“ALookatEstateTaxReturnsFiledforWealthyDecedentsSince2001,”StatisticsofIncomeBulletin,InternalRevenueService,Fall2009,http://www.irs.gov/pub/irs‐soi/09fallbuletreturn.pdf.

36ArthurB.Kennickell,“TossedandTurned:WealthDynamicsofU.S.Households,2007‐2009,”FinanceandEconomicsDiscussionSeriesDivisionofResearch&StatisticsandMonetaryAffairs,FederalReserveBoard,2011,http://www.federalreserve.gov/pubs/feds/2011/201151/201151pap.pdf.

37RobertFrank,“TheWildRideofthe1%,”TheWallStreetJournal,October22,2011,



http://online.wsj.com/article/SB10001424052970204346104576638981631627402.html.

38MeganMcArdle,“The1%Ain’tWhatItUsedtoBe,”TheAtlantic,October19,2011,http://www.theatlantic.com/business/archive/2011/10/the‐1‐aint‐what‐it‐used‐to‐be/247011.

39WojciechKopczukandEmmanuelSaez,“TopWealthSharesintheUnitedStates,1916‐2000:EvidencefromEstateTaxReturns,”NationalBureauofEconomicResearch,March15th,2004,http://www.columbia.edu/~wk2110/bin/estate‐NBER.pdf.

40WojciechKopczuk,“Resentingtherich,”EconomistDebates,TheEconomist,April16th,2009,http://www.economist.com/debate/days/view/300.

41Raub,2009.

42“PresentLawandBackgroundRelatingtotheFederalTaxTreatmentofCharitableContributions,”JCX‐55‐11,JointCommitteeonTaxation,October14,2011,http://www.jct.gov/publications.html?id=4371.43“U.S.TrustInsightsonWealthandWorth:SurveyofHighNetWorthandUltraHighNetWorthAmericans2011Highlights,”2011.

44“EstateTaxStatistics,”IRS,2010.Seealso:Sarji,2010.

45JustinBryan,“IndividualIncomeTaxReturns,2009,”StatisticsofIncomeBulletin,InternalRevenueService,Fall2011,http://www.irs.gov/pub/irs‐soi/11infallbulincome.pdf.46DavidS.Logan,“TheEconomicEffectsoftheEstateTax,”TestimonybeforethePennsylvaniaHouseFinanceCommittee,TaxFoundation,October17,2011,http://www.taxfoundation.org/research/show/27709.html.

47RobertMcClellandandPamelaGreene,“TheEstateTaxandCharitableGiving,”CongressionalBudgetOffice,July2004,http://www.cbo.gov/ftpdocs/56xx/doc5650/07‐15‐CharitableGiving.pdf.

48UniOsili,Ph.D.et.al.,“The2010StudyofHighNetWorthPhilanthropy:IssuesDrivingCharitableActivitiesamongAffluentHouseholds,”TheCenteronPhilanthropyatIndianaUniversity,IndianaUniversity’sCenterforSurveyResearch,November2010,http://phx.corporate‐ir.net/External.File?item=UGFyZW50SUQ9NDAzMzE0fENoaWxkSUQ9NDExNTE2fFR5cGU9MQ==&t=1.

49WilliamAhern,“TheFederalEstateTax:WillItRiseFromtheGravein2011orSooner?”SpecialReport179,TaxFoundation,May2010,www.taxfoundation.org/files/sr179.pdf.50Ahern,2010.

51EdMcCaffery,“It’sUnfair,andThere’saBetterWay,”TheWallStreetJournal,September20,2010,http://online.wsj.com/article/SB10001424052748704206804575467920711270954.html.



52MarcoCagettiandMariachristinaDeNardi,“EstateTaxation,Entrepreneurship,andWealth,”WorkingPaper13160,NBERWorkingPaperSeries,NationalBureauofEconomicResearch,June2007,http://www.nber.org/papers/w13160.pdf.

53“ReconsideringtheTrueRevenueYieldoftheEstateTax,”ResearchReport109‐38,JointEconomicCommittee,June2006,http://jec.senate.gov/republicans/public/?a=Files.Serve&File_id=5da53b1b‐eaf5‐4905‐8720‐d3ea50c09b62.

54LaurenceJ.KotlikoffandLawrenceH.Summers,“TheContributionofIntergenerationalTransferstoTotalWealth:AReply,”WorkingPaper1827,NationalBureauofEconomicResearch,February1986,http://www.nber.org/papers/w1827.pdf.

55DouglasHoltz‐EakinandCameronT.Smith,“GrowthConsequencesofEstateTaxReform:ImpactsonSmallandFamilyBusinesses,”AmericanFamilyBusinessFoundation,September2010,http://www.nodeathtax.org/uploads/view/2028/economic_impacts_of_estate_tax_reform_9‐13‐10.pdf.

56JosephE.Stiglitz,“NotesonEstateTaxes,Redistribution,andtheConceptofBalancedGrowthPathIncidence,”JournalofPoliticalEconomy,Vol.86:S137‐S150,April1978,http://www.jstor.org/stable/1829760.

57J.ScottMoody,WendyP.Warcholik,andScottA.Hodge,“TheRisingCostofComplyingwiththeFederalIncomeTax,”TaxFoundationSpecialReport138,December2005,http://www.taxfoundation.org/files/sr138.pdf.

58Gokhale&Villarreal,2006.

59“FederalEstateandGiftTaxes,”EconomicandBudgetIssueBrief,CongressionalBudgetOffice,December18th,2009,http://www.cbo.gov/ftpdocs/108xx/doc10841/Estate_GiftTax_Brief.shtml.

60“U.S.TrustInsightsonWealthandWorth:SurveyofHighNetWorthandUltraHighNetWorthAmericans2011Highlights,”2011.

Cost and Consequences of the Federal Estate Tax

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