The Economics of the Estate Tax: An Update

Executive Summary

This analysis examines the arguments for and against the federal estate tax and concludes that the estate tax generates costs to taxpayers, the economy, and the environment that far exceed any potential benefits that it might arguably produce.

• The existence of the estate tax has reduced the stock of capital in the economy by approximately $497 billion, or 3.2 percent.

• The estate tax is a leading cause of dissolution for thousands of family-run businesses, diverting resources available for investment and employment.

• The estate tax is a “virtue tax” in the sense that it penalizes work, saving and thrift in favor of large- scale consumption.

• Empirical and theoretical research indicates that the estate tax is ineffective at reducing inequality and may actually increase inequality of consumption.

• The estate tax raises very little, if any, net revenue. The distortionary effects of the estate tax result in income tax losses that are roughly the same size as estate tax revenue.

• Estate taxes force the development of environmentally sensitive land. Through 2001, 2.6 million acres of forest land were harvested and 1.3 million acres were sold each year to raise funds to pay for estate taxes.

This analysis summarizes the arguments for and against the federal estate tax and concludes that the estate tax generates costs to taxpayers, the economy and the environment that far exceed any potential benefits that it might arguably produce. Most of the arguments summarized here were originally published in the 1998 Joint Economic Committee study The Economics of the Estate Tax. Where feasible and appropriate, the current report updates the previous study to reflect newer data and supplements that study to reflect more recent research.

This paper documents the extensive costs associated with the federal estate tax. Specifically, the report finds:

• The existence of the estate tax has reduced the stock of capital in the economy by approximately $497 billion, or 3.2 percent, based on the 1998 analysis.

• The distortionary incentives in the estate tax result in the inefficient allocation of resources, discouraging savings and investment and lowering the after-tax return on investments.

• The estate tax is extremely punitive, with marginal tax rates in 2003 reaching 49 percent.

• The estate tax is a leading cause of dissolution for thousands of family-run businesses.

Estate tax planning further diverts resources available for investment and employment.

• The estate tax obstructs environmental conservation, as the need to pay large estate tax bills often forces families to divide or develop environmentally sensitive land. Through

2001, 2.6 million acres of forest land were harvested and 1.3 million acres were sold each year to raise funds to pay for estate taxes

• The estate tax violates the basic principles of a good tax system: it is complicated, unfair and inefficient.

In addition, a review of the arguments in favor of the estate tax suggests that the tax produces no benefits that would justify the large social and economic costs.

• The estate tax is a “virtue tax” in the sense that it penalizes work, savings and thrift in favor of large-scale consumption.

• Empirical and theoretical research indicates that the estate tax is ineffective at reducing inequality and may actually increase inequality of consumption.

• The enormous compliance costs associated with the estate tax are of the same general magnitude as the tax’s revenue yield, or about $22 billion in 2003.

• The deduction for charitable bequests stimulates little or no additional giving.

• The estate tax raises very little, if any, net revenue for the federal government. The distortionary effects of the estate tax result in losses under the income tax that are roughly the same size as estate tax revenue.


Benjamin Franklin noted over 200 years ago that “in this world nothing can be said to be certain, except death and taxes.”[1] Unfortunately, the convergence of these two inescapable events, in the form of the federal estate tax, results in a number of destructive outcomes in terms of slower economic growth, reduced social mobility and wasted productive activity. Moreover, the costs imposed by the estate tax far outweigh any benefits that the tax might produce.

Some observers might believe that the estate tax is free from serious controversy. For example, it is often claimed that the tax only falls on the “rich” and thus serves to reduce income inequality. Other supporters of the estate tax point to the $22 billion in tax revenues for 2003, or to the incentive for charitable bequests. Nonetheless, there are many reasons to question the value of taxing the accumulated savings of productive citizens. Not the least of these reasons is the widely-held belief that families who work hard and accumulate savings should not be punished for sound budgeting. Additionally, it is unclear whether the estate tax raises any revenue at all, since most if not all of its receipts are offset by losses under the income tax.

To preview the results of the present analysis, consider the conclusion drawn by Henry Aaron and Alicia Munnell, two prominent liberal economists, in their study of the estate tax:

In short, the estate and gift taxes in the United States have failed to achieve their intended purposes. They raise little revenue. They impose large excess burdens. They are unfair.[2]

This paper summarizes the 1998 Joint Economic Committee study The Economics of the Estate Tax.[3] Where feasible and appropriate, the current report updates the previous study to reflect more recent data and legislation. Readers wishing additional information on the various arguments for and against estate taxation, or more detailed documentation, should consult the 1998 study.


The estate tax, also known as a death tax, is simply a tax imposed on wealth transfers made at the holder’s death. Three times in this nation’s history a federal death tax has been imposed only to be repealed shortly thereafter. In each instance, the tax was implemented to provide revenue on a short-term basis to finance military action (1797-1802, 1862-1870, and 1898-1902). With the advent of World War I, the estate tax was reintroduced in 1916 and has existed ever since.

The 2001 Economic Growth and Tax Relief Reconciliation Act (EGTRRA), among other things, implemented a gradual reduction in federal estate taxes, culminating in full repeal in 2010 (Table 1).[4 ]Gift taxes were cut, effective in 2010, to equal the top applicable income tax rate. The rules of the U.S. Senate make it difficult to implement permanent changes (lasting longer than ten years) in reconciliation than ten years) in reconciliation legislation. Thus, the estate tax repeal was made

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temporary, followed by full estate tax restoration in 2011 to 2001 levels.


Supporters of the estate tax generally rely on three different arguments. First, supporters claim the estatetax reduces inequality. Second, estate tax advocates contend that the deduction for charitable bequestsinduces giving to nonprofit organizations. Finally, supporters argue that the $22 billion it is expectedtoraiseinfiscalyear2003warrantstheestatetax’sexistence.

A. Inequality and the Distribution of Wealth

One of the most common arguments made in favor of the estate tax is that it reduces income and wealthinequality. Supporters of the estate tax contend that since the high tax rates apply only to the “rich,” theeffect should unambiguously reduce inequality. This assertion actually relies on two assumptions: thathigh estate tax rates are “good” according to a liberal, progressive philosophy; and that high estate taxrates do in fact reduce inequality.

Both of these assumptions are flawed. First, the estate tax fails on liberal, progressive grounds because itdiscourages work and savings in favor of large-scale consumption. The liberal philosophical argumentagainst the estate tax is articulated by legal scholar Edward McCaffery, who identifies himself as an “anunrequited liberal … whose views on social and distributive justice might best be described as progressive.”[5] McCaffery argues that in its basest form, the estate tax actually undermines the veryconcept of fairness and equality that the liberal progressive movement ought to support:

The estate tax discourages behavior that a liberal, democratic society ought to like work, savings, bequests – and encourages behavior that such a society ought to suspect – the large-scale consumption, leisure, andinter vivos giving of the very rich. … The estate tax is an anti-sin, or a virtue, tax. It is a tax on work and savings without consumption, on thrift, on long-term savings. There is no reason even a liberal populace needsupport it.[6]

On the second assumption, there simply is no empirical evidence that the estate tax actually reduces inequality. A large body of empirical and theoretical research has emerged showing that inheritance either is not a major source of inequality, or that government policies aimed at inheritance are likely to be ineffective. There are three reasons for such conclusions. First, there is only a weak correlation between wealth and income. Thus, the reduction of wealth transfers can have only a limited impact on the distribution of earnings. Second, efforts to curtail wealth transfers will induce wealth holders to increase their consumption, thereby increasing the inequality of consumption. Finally, the high degree of wealth and income mobility in society means that government efforts to redistribute wealth will necessarily meet with limited success.

Much of the research which suggests that the estate tax is a poor tool to address inequality has been done by economists who themselves are generally sympathetic to issues of income inequality. Alan Blinder, aformer member of the Federal Reserve Board appointed by President Bill Clinton, found that only about 2 percent of inequality was attributable to the unequal distribution of inherited wealth, leading him to conclude that “a radical reform of inheritance policies can accomplish comparatively little income redistribution.”[7]

Another critical analysis comes from Joseph Stiglitz, who served as Chairman of President Clinton’s Council of Economic Advisers. Taking into account the long-term impact on capital accumulation, Stiglitz found thatthe estate tax may ultimately increase income inequality.[8] Even if the government acts to offset these capital accumulation effects, Stiglitz argued that the “desirability of the estate tax may still be questioned, notonly because of the distortions which it introduces but also because it may actually increase inequality in the distribution of consumption.”

Stiglitz further argued that inheritances actually decrease inequality: because inheritances redistribute income within families, they may decrease inequality in lifetime consumption.[9 ]In yet another analysis,Stiglitz concluded that “it would seem clear that inheritances are unambiguously equality increasing” in terms of consumption, and an argument can be made that inheritances reduce inequality of income andwealth as well.[10] The conclusions reached by Blinder and Stiglitz have been replicated by numerous other researchers.[11]

Survey data also confirm these conclusions. A study of wealthy investors by Prince & Associates found that just 7 percent of respondents identified inheritance as the source of their wealth.[12] In The MillionaireNext Door, authors Thomas Stanley and William Danko report that 81 percent of millionaires are first-generation rich, and just 14 percent cite inheritance as the source of their wealth.[13]

The fact that just four out of five millionaires are first-generation rich raises the question: if inheritance is not the source of their wealth, how did these did these individuals become millionaires? Stanley andDanko’s survey indicates that the primary mechanism of achieving wealth is for families to manage their money effectively and lead a frugal lifestyle. Contrary to conventional wisdom, most millionaires do not leadhigh-priced lifestyles. For example, the typical millionaire has never spent more than $400 on a suit and paid just $24,800 for his current automobile.

B. Charitable Contributions

One objection to a reduction in the estate tax is that it would reduce contributions to charitable organizations. Because the estate tax allows individuals to deduct gifts to charitable organizations, there is a significant tax incentive to donate money at one’s death. Reducing the tax on estates, the argument goes, could cause people to donate less money to charity. Recent research on this subject, however, indicates that the charitable tax deduction exerts only a modest, if any, stimulative effect. Although the charitable deduction may affect the timing of donations, it may not significantly alter the overall level of giving.

Despite the substantial tax benefits, a casual review of the data provides little evidence that tax incentives greatly affect charitable bequests. According to IRS data, only 20 percent of taxable estate tax returns actually made a charitable bequest on returns filed in 2001. Four out five tax estate tax returns did not take advantage of the price benefit of a charitable bequest.[14]

Remarkably, a similar percentage – 22 percent – of households nationwide (most of whom do not receive tax benefits from charitable bequests) have either already included a charitable bequest in their will (8 percent) or are considering doing so (14 percent).[15]

To a certain degree, even these numbers overstate the scope of charitable giving, as a very small number of estates account for the vast majority of bequests to charity. The most recent tax return data indicate that the wealthiest 0.18 percent of decedents accounted for 79 percent of all charitable bequests made in 2000. In fact, a mere 0.011 percent of decedents (260 estate tax returns out of 2.4 million deaths) accounted for more than 38 percent of all charitable bequests that year.[16]

One of the most revealing studies on this subject found that individuals who gave generously during their life gave little at death, while those who gave little during life tended to give much more at death.[17] In brief, this research suggests that tax incentives may play a relatively limited role in determining total lifetime giving. Tax incentives may induce some donors to give their contributions earlier in life, but on balance, it appears that tax incentives (both income and estate) do not greatly alter the total amount of charitable giving made over an individual’s lifetime.

The estate tax may actually be one of the greatest obstacles to charitable giving, as estate taxes crowd out charitable bequests. A survey of wealthy households (net worth of at least $5 million) found that respondents expected to distribute 16 percent of their estates to charity and 37 percent to taxes. However, respondents also indicated how they would prefer to distribute their wealth, with 26 percent going to charity and just 9 percent to taxes. In other words, for a $10 million estate, the wealth holder expected to leave $1.6 million to charity. In the absence of excessive estate taxation, the amount going to charity would increase 62.5 percent to $2.6 million.[18] In fact, some research suggests that repeal of the estate tax could actually result in an increase in charitable bequests.[19]

C. Federal Revenue

A third objection to cutting estate taxes is the alleged loss of revenue to the federal government. The estate tax accounts for a relatively small portion of federal revenue. Although the $22 billion that the estate tax will raise in 2003 is hardly insignificant, it amounts to only about 1.1 percent of the $1.9 trillion in total receipts (Figure 1).[20]

The available data indicate that the estate tax may actually result in a net revenue loss for the federal government. The primary payers of the estate tax, the wealthy, tend to be well- educated about and

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Source: Congressional Budget Office willing to engage in extensive tax avoidance strategies. Moreover, it is difficult for any tax to assess accumulated savings and capital because such holdings can be manipulated through tax- free transfers and favorable asset valuation. These features led Joseph Stiglitz, chairman of President Clinton’s Council of Economic Advisers, to conclude that,

Of course, prohibitively high inheritance tax rates generate no revenue; they simply force the individual to consume his income during his lifetime.[21]

A more in-depth examination of the net revenue effect of the estate tax comes from Stanford University economist Douglas Bernheim. As has been well documented, the estate tax affords many opportunities toavoid paying any tax at all. However, such avoidance strategies principally occur by shifting resources from parents to their heirs. In general, revenue is lost whenever assets are transferred from parents in highincome tax brackets to children (who typically face lower tax rates) or to tax-exempt organizations through charitable bequests.[22]

Through an analysis of estate tax returns under different assumptions and tax regimes, Bernheim found that the income tax revenue loss associated with these factors is very large relative to the revenue raised by the estate tax. In sum, Bernheim concluded:

Although it is very difficult to estimate these effects precisely, in recent years true estate tax revenues may well have been negative.[23] (emphasis added)


This section of the paper reviews the theoretical and empirical arguments against estate taxation. The four arguments considered here are that estate taxes: inhibit capital accumulation and economic growth; threaten the survival of family businesses and depress entrepreneurial activity; violate the principles of good tax policy; and adversely impact the conservation of environmentally sensitive land.

A. Economic Growth

Of all taxes imposed by the federal government, the estate tax is one of the most harmful to economic growth when measured on a per-dollar-of-revenue-raised basis. Although relatively small in terms of revenueraised, the estate tax is exerts a disproportionately negative impact on the economy. At its basest level, the estate tax adds yet another layer to the already heavy taxation of savings and investment.

The negative economic effect manifests in multiple ways. First, the estate tax has excessively high cmpliance costs. Although it is possible to avoid most, if not all tax liability on estates, doing so requires asubstantial amount of planning and undesired allocation of resources. Alicia Munnell, a member of President Clinton’s Council of Economic Advisers, estimated that the costs of complying with estate tax laws areroughly the same magnitude as the revenue raised.[24] Based on this ratio, compliance costs would amount to about $22 billion in 2003. Thus, for every dollar of tax revenue raised by the estate tax, another dollar issquandered in the economy simply to comply with or avoid the tax.

Secondly, the estate tax is a tax on capital, and as such it reduces the incentive to save and invest. The estate tax directly results in the loss of capital because it forces privately-held assets to be liquidated andtransferred to governmental control. Wealth that would otherwise serve productive uses in the economy as capital assets, are transferred to consumption-intensive government uses. According to James Poterba,an economist at the Massachusetts Institute of Technology, the federal estate tax increases the effective tax burden on capital income by 1.3 to 1.9 percentage points.[25]

By reducing the after-tax return on investment, the estate tax encourages consumption and discourages savings, which in turn cause the capital stock to grow at a slower rate. To illustrate this effect, consider asituation where parents must choose between leaving an asset to their children or consuming it themselves. When faced with a 49 percent marginal tax rate, the “price” of bequeathing $1 is nearly $2 ($1.96). Alternatively, the parents could consume significantly more of that $1.96 for their own benefit. In the presence of high marginal estate tax rates, the decision between consumption and saving is significantly biasedin favor of consumption. In his public finance textbook, Stiglitz, while admitting to some ambiguity, argues that on balance estate taxes “probably” reduce savings.[26]

A comprehensive estimate of all the negative impacts of the estate tax on economic growth is beyond the scope of this paper. However, an econometric framework is available for analyzing the effect of the estatetax on the existing capital stock. According to published research, every $1 reduction in the annual flow of intergenerational transfers is associated with a corresponding loss of roughly $39 in the long-run amountof capital in the economy. The 1998 Joint Economic Study estimated that the estate tax has reduced the stock of capital in the economy by approximately $497 billion, or 3.2 percent.[27]

B. Family Businesses and Entrepreneurial Activity

In addition to the aggregate effect on capital accumulation and economic efficiency, the estate tax exerts a strongly negative influence on entrepreneurial activity. Entrepreneurship infuses the economy with risk-takers willing to exploit new technologies and enables families to achieve upward income mobility. By hindering entry into self-employment and by breaking up family-run businesses, the estate tax inhibits economic efficiency and stifles innovation.

The existing tax code already offers family businesses limited estate tax relief. The chief provision has been a deduction for qualified family-owned businesses that allows such firms to shelter up to $1.3 millionfrom estate taxation. However, the EGTRRA of 2001 repeals this provision effective in 2004, when the unified credit allows all estates to shield $1.5 million in assets, thus superceding the older provision. Otherprovisions preserved in EGTRRA for family- run businesses include the ability to apply to the IRS to pay estate tax bills in installments over 14 years. This is particularly useful for family farms, which may be asset-richand cash-poor. Family businesses may also attempt to apply special valuation rules to their enterprise, which allow them to be valued at their current actual usage (subject to caps on the reduction in value), ratherthan at a potentially more valuable usage. In addition, the EGTRRA of 2001 made it easier for family businesses to qualify for these benefits.

Although these tax provisions do provide some relief, they are often inadequate to prevent the estate tax from breaking up many family businesses. Survey data indicate that the estate tax continues to be a primaryreason why small businesses fail to survive beyond one generation. In fact, the estate tax is more likely to be the cause of failure during business succession than is the health or success of the business itself. A survey of family business owners by Prince & Associates found that 98 percent of heirs cited “needed to raise funds to pay estate taxes” when asked why family businesses fail.[28]

To the degree that the estate tax disrupts the transmission of a family business to succeeding generations, the estate tax impedes upward income mobility. Entrepreneurship is a key means by which lower-incomehouseholds move to a higher-income class. For instance, one study found that low-wealth workers who become self-employed are more than twice as likely to move to a higher wealth class than are individuals whocontinue traditional work.[29]

Estate tax planning is crucial for the succession of family businesses to the next generation. The presence of the estate tax already makes such succession planning unnecessarily complicated and painful. Yet the current situation in which the level of estate taxation is uncertain precludes any sound planning. As the law now stands, the estate tax will slowly be phased out over the next several years until complete repeal in 2010. However, effective January 1, 2011, the repeal itself is revoked, and the estate tax returns to the level that existed in 2001. Thus, a difference in death of just a single day could mean the difference between no estate tax at all or extremely punitive taxation. This contradiction represents a major hurdle to any successful passing of family-run businesses to the next generation.

Concerns about the obstacles involved in passing a family business on to the next generation are especially significant for minority groups. Research indicates that blacks are more likely to become self-employed if their parents are self-employed than are other ethnic groups.[30] By making it more difficult for blacks to continue a family business, the harmful effects of estate taxes are magnified for black-owned enterprises.

Key black business leaders have advocated for estate tax repeal, arguing that it is only since the Civil Rights Act of 1964 that blacks have been able to accumulate wealth. Robert L. Johnson, the founder of BlackEntertainment Television and contributor to Democrat political causes, has even argued that “Elimination of the estate tax will help close the wealth gap in this nation between African-American families and whitefamilies.”[31] In fact, wealth accumulation was the lead essay in the National Urban League’s The State of Black America 1998, concluding that “new and bold policy initiatives are needed to help African Americansaccumulate assets to undergird their own social mobility and that of their children.”[32]

For many low-income minority or ethnic groups, the estate tax represents a major obstacle to a successful family business. The importance of passing a family business to the next generation was the subject of a 1995 article in the magazine Black Enterprise, which reported:

Leaving a legacy for future generations is a key motivation for pursuing entrepreneurship, particularly for African Americans. But achieving that legacy isn’t easy. Only one in three family firms survives two generations; only one in six survives three generations. “The challenge is not starting a family business, but being able to pass it on from generation to generation,” says John Sibley Butler, professor ofmanagement and chairman of sociology at the University of Texas at Austin.[33]

A similar sentiment is reflected in the advice of the financial planning book The Black Woman’s Guide to Financial Independence:

Estate taxes are the most expensive taxes you will ever have to pay. The federal estate tax has graduated rates ranging from 40-55%. The more you have, the higher the tax rate. This is money you haveearned and should be passed on to your heirs instead of to the federal government.[34]

The principal reason that estate taxes cause such disruption to family businesses is that they impose large cash demands on firms that generally have limited access to liquid assets. For example, the typical smallbusiness owner has 60 percent of the family net worth invested in the business.[35] Smaller firms, typically lacking access to capital from financial markets, may be unable to obtain the optimal amount of capital tofinance their investments. Intergenerational transfers function, in essence, as a sort of internal financing mechanism. To the degree that estate taxes reduce or limit intergenerational transfers, they also reduce theamount of financing available for investment in small or family-run enterprises.

Inheritances play an important role in alleviating the liquidity constraints that impede the formation and success of small businesses. A 1994 study found that individuals who receive an inheritance are more likely to become self-employed, and those who are already self-employed are more likely to remain so.[36] Overall, the authors estimate that receiving a $150,000 inheritance (in 1985 dollars) results in a 1.3 percentage point increase in survival probability and a 20 percent increase in gross receipts.

C. Fairness, Simplicity and Efficiency

The estate tax violates the three principles of good tax policy: equity, simplicity and efficiency. The large number of tax avoidance options permitted under the estate tax (dubbed the “voluntary tax”) means that the tax will result in a tax burden distributed unfairly among payers of the tax, will be unnecessarily complicated, and will significantly distort taxpayer behavior.

In terms of equity and simplicity, the existence of so many loopholes virtually guarantees that the estate tax will violate the principles of horizontal and vertical equity, as well as that of simplicity. An individual worth $5 million can not only pay less in estate taxes than other individuals worth $5 million, but can pay less than those worth $1 million. According to IRS data for 2001 returns, the average estate tax rate for the largest estates (gross estates over $20 million) is actually lower than the average rate for estates in the $2.5 to $5 million range. This aspect of estate taxation was summarized by Munnell, who wrote:

Horizontal and vertical equity considerations have disappeared in the estate and gift area; tax liabilities depend on the skill of the estate planner, rather than on capacity to pay.[37 ](emphasis added)

The efficiency of a tax system refers to the costs of complying with the tax. An efficient tax should not impede economic growth or change the way people behave. As previously noted, Aaron and Munnell estimate that the compliance costs of the estate tax are roughly the same size as the amount of revenue raised:

In the United States, resources spent on avoiding wealth transfer taxes are of the same general magnitude as the [revenue] yield, suggesting that the ratio of excess burden to revenue of wealth transfer taxes isamong the highest of all taxes.[38]

In 2002, the estate and gift taxes raised $27 billion. However, based on Aaron and Munnell’s analysis, the true cost to the economy of these taxes was closer to $54 billion. In other words, for every $1 removed from the economy to pay estate taxes, another $1 is wasted in order to comply with or legally avoid the tax. Measured in these terms, the estate tax is highly inefficient.

D. Environmental Conservation

An often-overlooked aspect of the estate tax is its harmful effect on the environment. The impact manifests when heirs are forced to divide up or develop environmentally sensitive land in order to pay estate taxes. The problem of estate taxation faced by private landowners was addressed by The Keystone Report:

Federal estate tax requirements are a major obstacle for private landowners whose land stewardship has been sensitive to its environmental value and who would like to be able to pass on their land to their heirswithout destroying that value. The imposition of federal estate taxes often forces large parcels of environmentally valuable land to be broken up into smaller, less environmentally valuable parcels. Some of thebest remaining habitat for endangered species is put at risk in this manner.[39]

When the time comes to pay estate taxes, real estate assets often produce a substantial tax liability that can only be paid by developing the land. The impact is most apparent for natural habitats that are destroyed.Endangered species are affected as well, since about one-half of all listed species are found only on privately-owned land. These effects of estate taxation led Michael Bean of The Nature Conservancy to label theestate tax as “highly regressive in the sense that it encourages the destruction of ecologically important land in private ownership.”[40]

A 2001 analysis of estates and rural land holdings found that estate taxes have significant impacts on land use.[41] According to this study, conducted prior to EGTRRA of 2001, approximately 2.6 million acres of forestland must be harvested each year to pay for the estate tax. Another 1.3 million acres must be sold to raise funds to pay estate taxes, of which close to one-third (29 percent) is either developed or converted to otheruses. Moreover, 36 percent of forest estates incur an estate tax liability, far higher than the overall rate in the U.S. population.

In recognition of the adverse environmental impact of taxing estates, the current federal tax code grants limited estate tax relief for qualifying “conservation easements,” land that is set aside for environmental conservation. Land owners are exempt from paying estate taxes on the value of land that is lost due to the conservation easement (subject to certain requirements). The Taxpayer Relief Act of 1997 granted estates that donate such easements an additional tax deduction worth 40 percent (up to a maximum of $500,000) of the remaining value of the land. The EGTRRA of 2001 further assisted conservation efforts by making more land eligible to qualify as a conservation easement.

The conservation easement provisions, however, fall considerably short of remedying the tax’s adverse environmental impact. Even with the limited conservation easement now in place, many estates will not, for a variety of reasons, take advantage of the option. Although many environmentalists would prefer expanding conservation easement options rather than complete repeal of the estate tax, it is nonetheless clear that the federal estate tax represents a continuing threat to endangered and threatened species and habitats.


This paper has documented the extensive costs associated with the federal estate tax. The detrimental effects of the estate tax are grossly disproportionate to the modest amount federal revenue it raises (if it raises any net revenue at all). Estate taxes result in a large amount of wasted economic activity. Over its lifetime, the presence of the estate tax has cost the economy roughly one-half a trillion dollars in capital stock. Moreover, the estate tax destabilizes family businesses at one of their most vulnerable points, the succession from one generation to the next. The enormous liquidity demands of the estate tax have contributed to the break up of thousands of small businesses as well as the destruction of environmentally sensitive land. In generating these outcomes, the estate tax has violated the basic principles of a good tax system – simplicity, fairness and efficiency.

If the estate tax generated sufficiently large benefits, then an argument could be made to justify its existence. However, all the evidence indicates that the estate tax has no redeeming qualities. There is no theoretical or empirical basis to suggest that the estate tax promotes fairness or reduces inequality. In addition, research indicates that the deduction for charitable bequests stimulates little or no additional giving. Even the $23 billion in revenue it raises is illusory, since estate tax avoidance activities likely generate equally large revenue losses under the income tax.

The estate tax is an unfortunate feature of the current federal tax system. The estate tax’s punitive tax rates are not only the highest of all federal taxes (reaching nearly 80 percent), but are imposed at the mostinappropriate of times – the death of a loved one. As if mourning such a loss were not enough, the federal government worsens the pain by seeking to confiscate upwards of one-half of all the decedent’saccomplishments and successes. This final injurious grievance simply strengthens the conclusion that the estate tax generates costs to taxpayers, the economy and the environment that far exceed any potentialbenefits that it might arguably produce.

Dan Miller

Senior Economist


[1]John Bartlett,FamiliarQuotations,16thed. (Boston, MA:Little, Brownand Company,1992),310.

[2]The authors go on to prescribe ways to reform and improve the estate tax. Henry J. Aaron and Alicia H. Munnell, “Reassessing the Role for Wealth Transfer Taxes,” National Tax Journal 45, no. 2 (June 1992): 138.

[3]Joint Economic Committee, The Economics of the Estate Tax, 103rdCongress, 2ndSession, prepared by Daniel Miller (December 1998).

[4]For additional detail, see Congressional Research Service, “Estate and Gift Tax Law: Changes under the Economic GrowthandTaxRelief ReconciliationActof 2001,” CRSReport for Congress, RL31061 (updated 1/29/2002).

[5]EdwardJ. McCaffery, “Rethinking the Estate Tax,” TaxNotesToday,6/22/95.


[7]Alan S. Blinder,Toward an Economic Theory of Income Distribution (Cambridge, MA: MIT Press, 1974).

[8]Joseph E. Stiglitz, “Notes on Estate Taxes, Redistribution, and the Concept of Balanced Growth Path Incidence,” JournalofPoliticalEconomy86,no.2 (1978): S137-S150.

[9]David L. Bevan and Joseph E. Stiglitz, “Intergenerational Transfers and Inequality,” Greek Economic Review 1, no. 1 (August 1979): 13.

[10]Joseph E. Stiglitz, “Equality, Taxation and Inheritance,” in Personal Income Distribution: Proceedings of a Conference Held by the International Economic Association, Noordwijk aan Zee, Netherlands, April 18-23, 1977, eds. Wilhelm Krelle and Anthony F. Shorrocks (New York, NY: North-Holland Publishing Company, 1978), 283.

[11]See Joint Economic Committee,at notes18-24.

[12]“Majority of Rich Investors Made Fortunes through Hard Work According to Private Asset Management Study,” Business Wire, 6/14/94

[13]Thomas J. Stanley and William D. Danko, The Millionaire Next Door: The Surprising Secrets of America’s

Wealthy(Atlanta, GA: Longstreet Press,1996),16,32.

[14]Calculations based on data from Internal Revenue Service, “Estate Tax Returns Filed in 2001,” SOI Unpublished Data (April 2003), availableonline at,,id=96442,00.html.

[15]Scott R. Lumpkin, “A New Perspective on Philanthropy: Planned Giving in the United States,” Trusts & Estates (June2001): 14-17, 48.

[16]Calculations based on data from AAFRC Trust for Philanthropy, Giving USA 2002 (New York, NY: AAFRC Trust for Philanthropy, 2001); Internal Revenue Service; and U.S. Bureau of the Census, Statistical Abstractof the United States 2002 (Washington, DC: Government Printing Office, 2002), 74.

[17 ] Eugene Steuerle, “Charitable Giving Patterns of the Wealthy,” in America’s Wealth and the Future of

Foundations,ed.Teresa Odendahl (New York, NY: The Foundation Center, 1987),203-221.

[18]Deutsche Bank Private Banking, Wealth with Responsibility Study2000(2000),15.

[19]See Arthur W. Schmidt, “Philanthropy under the New Tax Law: An Issue of Life or Death,” The CPA Journal (August 2001): 10-14; Janice H. Burrill, “The Effects of Estate Tax ‘Repeal’ on Philanthropy,” Trusts &Estates (October 2001): 20-26; and Paul G. Schervish, “Philanthropy Can Thrive without Estate Tax,” Chronicle of Philanthropy (January 11, 2001).

[20]Congressional Budget Office, The Budget and Economic Outlook: Fiscal Years 2004-2013 (Washington, DC: CongressionalBudgetOffice, 2003),4-5,54-55.

[21]Bevanand Stiglitz, 21.

[22]Thisrevenueeffectholdsregardless of whether or not thecharitable deductioninducesadditionalgiving.

[23 ] B. Douglas Bernheim, “Does the Estate Tax Raise Revenue?” in Tax Policy and the Economy, vol. 1, ed. Lawrence H. Summers (Cambridge, MA: MIT Press, 1987), 113-138.

[24]Alicia H. Munnell, “Wealth Transfer Taxation: The Relative Role for Estate and Income Taxes,” New England EconomicReview,Federal ReserveBank ofBoston (November/December 1988):19;AaronandMunnell,139.

[25]James Poterba, “The Estate Tax and After-Tax Investment Returns,” Working Paper 98-11, Office of Tax Policy Research,University of Michigan (December1997), 17, 40.

[26 ] Joseph E.Stiglitz, Economics of the PublicSector,1st ed. (New York:W.W.Norton& Company,1986),487.

[27]This figure is an estimate of how much larger the capital stock would be if there had been no estate tax at all. See the 1998 Joint Economic study (supra note 3) for the methodology and the sensitivity of the estimates.

[28]Russ Alan Prince and Karen Maru File, Marketing to Family Business Owners (Cincinnati, OH: National


[29]Vincenzo Quadrini, “Entrepreneurship, Saving and Social Mobility,” Federal Reserve Bank of Minneapolis, Discussion Paper 116 (March 1997).

[30]Robert W. Fairlie, “The Absence of the African-American Owned Business: An Analysis of the Dynamics of Self-Employment,” JournalofLaborEconomics17, no. 1 (January 1999).

[31]Ernest Holsendolph, “Bush Picks up Unexpected Ally in BET founder,” The Atlanta Journal and Constitution, 8/26/2001.

[32]Melvin L. Oliver and Thomas N. Shapiro, “Closing the Asset Gap,” in The State of Black America 1998

(Washington,DC: NationalUrbanLeague, 1998).

[33]Adreienne S. Harris, “Saluting the Past, Shaping the Future; The Future of Black-Owned Family Business,” Black Enterprise,8/95.

[34]Cheryl D. Broussard, The Black Woman’s Guide to Financial Independence (New York, NY: Penguin Books, 1996), 151.

[35] John L. Ward, Drew Mendoza, Joseph H. Astrachan, and Craig E. Aronoff, “Family Business: The Effect of Estate Taxes” (Chicago,IL: Center for Family Business and Family Enterprise Center,1995), 29.

36Douglas Holtz-Eakin, David Joulfaian and Harvey S. Rosen, “Sticking It Out: Entrepreneurial Survival and

Liquidity Constraints,” Journal of Political Economy102,no.1 (February 1994): 68-71.


[38 ]Aaron and Munnell, 139.

[39]The Keystone Center, The Keystone Dialogue on Incentives for Private Landowners to Protect Endangered Species– FinalReport(Washington,DC:KeystoneCenter,1995),26.

[40]Michael J. Bean, “Shelter fromthe Storm,” TheNewDemocrat(April 1997).

[41]John Greene, Tamara Cushing, Steve Bullard, and Ted Beauvis, “Effect of the Federal Estate Tax on Rural Land Holdings in the U.S.,” in Forest Policy for Private Forestry: Global and Regional Challenges, eds. Lawrence D. Teeter, Benjamin Cashore, and Dao Zhang (New York, NY: CABI Publishing, 2003).

Previously published by the United States Congress- Joint Economic Committee, June 2003

Senior Economist, Joint Economic Committee, Washington, USA