In 1789, Benjamin Franklin famously observed, “In this world, nothing is certain except death and taxes.” It wasn’t until 1797 that U.S. politicians, in their wisdom, combined death and taxes, imposing a temporary federal estate tax on the American people to increase military spending. Adopted “temporarily” thrice more — the last time in 1916 on the cusp of World War I — the estate tax now remains the only living survivor of the Great War.
More than a century later, I joined 849 economists from universities, think tanks and businesses nationwide to convey to Americans: “Death should not be a taxable event. The estate tax should be repealed.”
Twenty-four years ago, Milton Friedman, the Nobel laureate, published an open letter calling for the repeal of the estate tax. More than 275 economists joined Milton by adding their names to his letter. Since then, hundreds more economists have signed onto his letter, bringing the cumulative number of signatories to 850.
Our open letter, signed by some of the country’s most prominent economic theorists and practitioners — including five Nobel laureates (Milton Friedman, 1976; Vernon Smith, 2002; Edward Prescott, 2004; Oliver Williamson, 2009; Eugene Fama, 2013) — laments how “the income used to accumulate the assets left at death was taxed when it was received; the earnings on the assets were taxed year after year; so, the estate tax is a second or third layer of taxation on the same assets.”
Family businesses that have paid taxes throughout their owners’ lives often end up “land or inventory rich” on paper but “cash poor,” putting them at risk of being hobbled by the estate tax. Few, if any, family farmers and manufacturers have the cash on hand to pay a 40 percent tax, levied at the worst possible time, while grieving the loss of a loved one. A family business that cannot easily raise liquid cash to pay the estate tax may be forced to lay off workers, sell off parts of the business, or, worst cases, shutter its doors for good.
The estate tax’s crushing effect on America’s family businesses severely affects the U.S. economy. A 2012 Joint Economic Committee study showed that the estate tax has reduced capital stock by more than $1 trillion since its inception in 1916. Less economic capital stock means forgone business creation, stifled innovation and fewer jobs.
In response to a question about raising the estate tax, Friedman argued, “Where do you get the factories? Where do you get the machines? Where do you get the capital investment? Where do you get the incentive to improve technology?”
While the estate tax’s effect on the economy is well known, you would be surprised by how little revenue the tax generates. Estate and gift taxes are expected to produce 0.57 percent of federal revenue this year. That’s not enough to fund the federal government for even one whole day!
A study issued earlier this year by Steve Moore, a longtime outside economic adviser to President Trump, concludes that each dollar raised by the estate tax results in five dollars lost from other taxes because of the collateral damage to family-owned businesses. The economic literature clearly shows that the estate tax is, dollar for dollar, the most inefficient and economically destructive tax on the books.
Moreover, the Tax Foundation this year found that the compliance costs associated with the estate tax are just as onerous as the tax itself, creating a bonanza for estate planning attorneys and life insurance executives on the backs of family businesses struggling to pass their legacies to the next generation.
President Trump, Vice President JD Vance and key congressional leaders have called for eliminating the estate tax. As such, Congress should include repeal of this unfair and economically destructive tax in the reconciliation bill that it is slated to consider this summer.
The message is unequivocal: eliminating the estate tax will lead to faster economic growth and likely boost federal revenue. The estate tax is bad, and pulling the plug is 100 years overdue.
