Economists Continue to Call for the Repeal of the Death Tax

Repealing the estate tax will reduce deficit more than the tax itself.

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The effort to permanently repeal the federal death tax is still very much alive.

The issue has been given new life by a letter released earlier this week by more than 250 prominent economists including several Nobel laureates, several former Federal Reserve Bank presidents and presidential economic advisers from the Kennedy, Ford, Reagan, and George W. Bush administrations.

The letter was issued to commemorate one written 10 years ago by the late economist and Nobel Laureate Milton Friedman who, with the support of more than 275 fellow economic theorists, argued the federal death tax ties up capital, punishes saving and investing, fails to raise substantial revenue, and actually increases economic inequality.

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At the same time the American Family Business Foundation released a study showing that federal death tax repeal would do more to reduce the deficit than increasing the tax, generating enough new revenue to cover just over 30 percent of the $1.2 trillion in deficit reduction required by 2021.

The study was conducted by Stephen J. Entin, a former deputy undersecretary of the Treasury who is now president of Institute for Research on the Economics of Taxation, and a former deputy undersecretary of the Treasury. 

Support for higher estate taxes in the name of increasing government revenues or reducing deficits is based on the unrealistic theory that every dollar not collected by the Treasury is a dollar lost—or what economists dub static losses, Entin explains. In the real economy, however, that same dollar, if not claimed by government, is often invested in new equipment, employees, or technology intended to increase a company's revenue.

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"This dynamic method demonstrates that the estate tax reduction would significantly lower, not raise, the federal deficit, and shows that the potential gains in GDP are substantial," Entin said. 

When compared to the various estate tax rate and exemption combinations being recommended by members of Congress, Entin calculates that repeal is by far the best policy option.  Across a 10-year budget window—2012 to 2021—he finds that repeal of the federal estate tax would:

  • Cover 30.18 percent of the $1.2 trillion in deficit reduction required of the Super Committee by 2021
  • Reduce the total budget deficit by 5.19 percent over the period and by 11.49 percent in 2021
  • Lead to a 2.26 percent increase in GDP ($538 billion) by 2021, for a cumulative gain of nearly $3 trillion over the period, compared to what would have happened under current law
  • Increase federal revenues over the 10-year period by about $362 billion (compared to current estate tax law); by 2021 the annual gain would be about $88 billion per year 
  • According to AFBF President Dick Patten, whose group commissioned the study, "Elimination of the estate tax is as close as one gets to a free lunch in economics. It is time to take advantage of it."

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