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Repeal of the Estate Tax as a Matter of Policy

Autor:   •  January 23, 2018  •  2,659 Words (11 Pages)  •  220 Views

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It can also be assigned to expanding opportunities and providing more access to social benefit to lower-income people who suffers hardship and need government’s assistance.

A Significant Government Revenue Source. This source of income can also help reduce the budget deficit. According to statistics from Congressional Budget Office, the estate tax, as a constituent part of government revenue, will generate about $246 billion over 2016-2025 under current law. This is significantly more than the amount the federal government will spend on the Food and Drug Administration, the Centers for Disease Control and Prevention, and the Environmental Protection Agency combined. More budget deficit reduction is needed to address US government’s longer-term fiscal problem in current stage, which is difficult even without estate tax loss. It would be irresponsible for policymakers to add more than $246 billion to the task of deficit reduction by cutting the taxes of estates tax. It will lead to further sacrifices from less-fortunate class citizens.

Social Equity. Another driving force behind the support for the estate tax is the concept of social equity. The inheritance of huge legacy from elder generation, which is unearned income, will make children of the wealthiest people in this country owning larger and larger portion of the capital pie of this country. "It's unfair; it's unjust; it's absurd." And this unfairness will be passed on to their later generations with little tax-related costs. Collection of estate tax can eliminate, to some extent, the unearned and unfair advantages created by unequal inheritance.

Demerits of the Federal Estate Tax

While the Federal estate tax meets many primary objectives for tax collection, opponents also claim several concerns and disadvantages of the estate tax and appeal to abolish this law.


Opponents’ concerns are mainly in the possibility of double taxation of estate tax, the suppression of national economy, capital flight due to tax rate difference between the US and other countries, and its negative influences on small business and farm owners.

The Possibility of Double Taxation. The components claim that when a beneficiary inherits an estate from a decedent, the inherited estate is double taxed. Because when the money used for purchasing that estate was already taxed to the decedent as income tax when the decedent realized those dollars income. The taxation of estate tax would lead to a double taxation of that portion of money.

Although many supporters argue that, due to the "stepped-up basis" rule, when a beneficiary inherits an estate by virtue of the death of the owner, the beneficiary's basis directly “stepped-up” to the estate’s fair market value at the date of decedent’s death (or an election for alternate valuation) instead of carrying over the adjusted basis from the decedent (which is usually much lower than the market value at time of his death, especially for real estate). When the beneficiary sells the estate later, the beneficiary does not owe any capital gains taxes on any increase in value added during the lifetime of the decedent. Although this rule seems to offset the loss of economic benefits of the beneficiary generated from his recognizing of the estate tax liability, the beneficiary can only take advantage of this rule if he sells the inherited estate later.

Suppression of National Economy. The estate tax would also reduce saving and capital stock in the economy, then further reduce the tax base of income tax. When facing with a potential high estate tax rate, which is 40 percent of an estate's value that exceeds 5.34 million in 2014, it costs $1.67 million for a decent to pass an estate to the beneficiary to give a $1 million


value. The virtue nature of taxing working and saving instead of taxing spending motivates wealth holders to reduce savings and increase consumption, leading to a result of discouraging capital accumulation for wealthy people.

The reduction of saving and increase of consumption further lead to a reduction of the amount of capital stock in the economy. The loss of capital stock translated into less economic activities, thereby lead to a smaller base of income tax. In a seminal study, B. Douglas Bernheim concluded that “lost income tax revenue alone can offset all of the revenues collected by the estate tax”.

Capital Flight. Wealth holders may utilize tax plan to avoid tremendous tax consequences generated due to the transfer of their estates and wealth. A huge gap between tax rates in two countries may encourage wealthy individuals to retire or relocate to another country to avoid or minimize their taxation. This consequence not only comes from an avoidance of high estate tax rate but is more usually a result of planning income tax. Capital from high income level outflow currently becomes a serious concern for many high tax countries.

Capital flow out of the United States may move the wealth and all associated future tax revenue outside the country. The estimated future tax revenue generated from outflow capital, due to estate tax influence, may be tremendous, even times of the amount of estate tax. Therefore, it is unwise to scarify a large portion of future tax revenue to collect estate tax.

Negative Influences on Family Business and Farm Owners. Another argument is that the estate tax burdens family-owned business and farmers a lot. Much of the value of family-owned businesses is tied to illiquid assets such as land, buildings and equipment. The


transfer of family-owned business to next generation may generate huge estate tax consequences, which can force the new owner to sell the business’s assets to get liquidity and pay the tax. In a similar way, agriculture involves the use of many capital assets, such as land generate with fewer assets. A taxation would also force the farm owner to sell assets to get liquidity.

“According to the Congressional Budget Office, approximately 5 percent of all estates that owed estate taxes in 2000 (the latest data available) had a tax liability that exceeded their liquid assets (i.e. bonds, corporate stock, bank accounts, and insurance); for estates of farmers, the figure was 8 percent, and for family-owned businesses, the figure was even greater, at


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