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Does It Cost the Wealthy Too Much to Die?
By:
Daniel Altman
Not content to phase out the estate tax through President Bush's 10-year plan, Republicans in Congress are now seeking to abolish the tax forever. But what is the economic rationale? Economists usually dislike taxes that distort people's behavior in ways that hurt society. The income tax leads some people to work less. The capital gains tax, some studies suggest, discourages saving. One might easily conclude that the estate tax discourages both working and saving, by taking away a portion of whatever is left over from those activities at the time of death. Douglas J. Holtz-Eakin, the chief economist at the president's Council of Economic Advisers, takes the argument a step further. By discouraging saving, he asserts, the tax hurts investment in the economy and leads to lower real wages. From an analytical standpoint, Mr. Holtz-Eakin has a point. Yet the scientific evidence is far from clear. "It's weak," said David Joulfaian, an economist at the Treasury Department, of the distorting power of the estate tax. "It's not in the magnitude or of the same flavor as with the income tax." People aren't really quitting work or saving less, he said. Instead, they are just recalibrating their portfolios and giving gifts, which are taxed at lower rates than bequests, while living. These changes, though distortions, should not have much effect on the health of the economy, he added. Moreover, the estate tax's effect on people's labor may be offset by their heirs. Heirs who dropped out of the labor force, Mr. Joulfaian's research shows, had received much larger bequests than those who kept working. In the words of Warren E. Buffett, the billionaire investor, it might be wisest to leave children "enough money so that they would feel they could do anything, but not so much that they could do nothing." Many of Mr. Joulfaian's results use data from income tax returns from 1982 and 1989. Research using later data, from the continuing Health and Retirement Study sponsored by the National Institute on Aging, comes from Mr. Holtz-Eakin. He happens to have studied the estate tax extensively while he was a professor at Syracuse University. His most recent paper on the estate tax, written with one of his students, Donald J. Marples, shows that the tax costs society 2 cents more on a dollar of wealth, in terms of unrealized economic activity, than would a tax on investment income that raised the same amount of revenue. And investment income taxes, Mr. Holtz-Eakin says, are among the most costly. The problem with this finding, as the authors themselves point out, is that it is not based on the people who pay the bulk of the estate tax. In 1999, some 60 percent of the estate tax was paid by the 8,500 taxpayers whose estates amounted to at least $2.5 million. The Health and Retirement Study selects about one in 3,000 Americans over the age of 50 to survey. So even if all 8,500 of America's Most Well-to-Do had been old enough, only three of them, on average, would have been selected for the study — hardly enough for a statistical analysis. Furthermore, as Mr. Holtz-Eakin and Mr. Marples concede, the "super rich" could be less responsive to the incentives of the estate tax than the general population, on whom the results are based. Economists generally believe that people with $2.5 million stashed away feel the loss of a dollar less acutely than those with just $25,000. The actual behavior of the wealthy is unknown. Because giving is untaxed, those facing the 55 percent estate tax essentially pay only 45 cents for each dollar contributed to charity — the rest would have gone to the government after their deaths. Mr. Joulfaian and his co-author at the Treasury Department, Gerald E. Auten, estimate that removing the estate tax could reduce an individual's lifetime donations by 12 percent. Of course, Republicans have argued that it simply isn't fair to tax away more than half of what a person is worth when he or she dies, especially because most of it should have been taxed once already. But here, too, some economists might disagree. Throughout our lives, our fellow taxpayers share in our financial risks, for better or worse. If we lose money on an investment, we can deduct our losses to reduce taxes we owe on gains from other investments. If our income falls, we pay lower tax rates. Sometimes we even get subsidies. If we die without much money, the government may pay for our burial and take care of our young children. If we happen to die with more money than we needed, might not the government share a bit of the upside, too? FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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