It's Time to Pull the Plug on Death Tax

The death tax is on life support, and it’s time to pull the plug. The Senate is expected to begin debating its repeal today and there are no excuses left. It’s a mystery that the tax’s defenders continue to tout it as a panacea for the country’s ills when there is conclusive and overwhelming evidence to the contrary.

If you know that the government will tax over half of your earnings upon your death, why work hard all of your life to build a legacy for your children? Small business owners try to save for their children, but instead of investing the hard-earned revenue back into the business, they often have to direct it out into the coffers to estate planners, lawyers, appraisers, and the life insurance industry.

The National Association of Insurance & Financial Advisors and the American Association for Life Underwriting, two of the largest life insurance industry lobbying and association groups, boast of their $3 million candidate contributions through their Insurance and Financial Advisors Political Action Committee. In 2006, they have endorsed many of the senators on watch lists for the death tax vote, including Democrats Baucus, Cantwell, Conrad, Feinstein, Landrieu, and Pryor, as well as Republicans Voinovich, Collins, and Chafee, among others.

It’s clear why the life insurance and estate planning industries don’t want to abolish the death tax. But what’s scary is the angry left’s class warfare motive for keeping the tax. They are obsessed with taxing the rich, which would be laughable if it were not so damaging to the American economy.

“Tax the rich” has always been the liberal mantra. Proponents of the death tax don’t seem to care that it reduces federal revenue, hurts small businesses, farmers and minorities disproportionately, or that a consistent majority of Americans want the death tax to die—they just slap a picture of Paris Hilton on an ad and talk about inequality.

The death tax hurts all Americans, not just rich ones. If you tax a business owner, you also tax that business’s employee. And somehow taxes on “the rich” have a way of reaching the middle class over time as government grows, which is why permanent repeal is so important. Let’s not forget that the income tax itself was originally supposed to be just for the rich, as was the alternative minimum tax—both increasingly the bane of the middle class.

Most senators who believe in the outdated class warfare mentality are astute enough not to do so openly. Instead they hide behind an excuse: they claim repeal of the death tax will increase the budget deficit.

Not true. To the casual observer of economics—or basic history, for that matter—it’s clear that cutting taxes on capital formation spurs growth and enhances government revenues. Taxes act as disincentives—discouraging savings and investment, productivity, and hiring. Supporters of the death tax ignore these simple and compelling truths.

The most recent evidence comes from the 2003 investor tax rate cuts, which were projected by the Joint Committee on Taxation (JCT) to have an enormous associated revenue loss. JCT was as wrong about that then as they are about the death tax now, and the facts prove it. A May 2006 study by Dan Clifton of the American Shareholders Association shows that the 2003 capital gains cut, in particular, has paid for itself already—16 times over! Tax cuts, in conjunction with spending cuts, can help reduce the deficit better than high taxes ever could, while increasing productivity and fueling huge economic gains.

The JCT score of death tax repeal is fraudulent. Not only does it disregard the strong supply-side effect we can reasonably expect, it also ignores the capital gains tax revenue that would result from the repeal law’s carryover basis provisions. Every independent analysis that takes these factors into account finds that repealing the death tax would actually increase federal revenues.

Any American—wealthy or otherwise—that wants to include the U.S. Treasury generously in his or her will should feel free to do so. But for the economy’s sake, Congress needs to seize this rare, once-in-a-decade opportunity and repeal this grossly inefficient tax: immediately, permanently, and completely.