Cost of Dying: Demystifying the Estate Tax

In an article for the The Washington Times, Heritage Foundation chief economist Stephen Moore argued that the American estate tax should be abolished. “If there were ever a right time to eliminate the estate tax in America, it is right now,” Moore wrote, calling the tax “the most immoral and counterproductive of all federal taxes.”

The estate tax today is one of the most controversial of all taxes. In essence, it is a tax on the transfer of property, such as cash, real estate, and business interests, at the time of your death. While to some, this tax has been seen as an added cost of dying, proponents argue it is an effective way to tax otherwise untaxable income. But when it comes to the bottom line, how effective is the estate tax in bringing in revenue?

Defending the Estate Tax

Those in favor of the estate tax argue that taxing large estates supports the social contract of equal opportunity. By taxing these large concentrations of wealth, there is, arguably, less of a need to tax earned income. The estate tax allows for the taxation of these inheritances in a manner that would not be possible under the income tax system. For example, many inherited estates, due to collected insurance policies and other end-of-life changes, reflect unrealized additional monies that would never be taxed once the assets are transferred.

Proponents of the estate tax also assert that inheritors of large sums are more likely to withdraw from social obligations, such as charitable giving or employment. Besides its social benefits, charitable giving is an essential part of estate management, as it creates a deduction against any estate tax assessed. The tax is also thought to prevent the accumulation of great concentrations of wealth.

The Right to Wealth

With federal estate taxation rates as high as 40 percent currently, many opponents of the tax argue that it penalizes success. They contend that the estate tax punishes those that seek to pass on the fruits of their labors, or their ancestors’ wealth, to their children. They also argue that the tax establishes a “death tax” or a cost of dying, which insults the mourning process.

Another argument against the estate tax looks to taxation internationally. The United States is one of the last nations to actually have an estate tax. This makes the U.S. less attractive for wealthy foreign investors, both in terms of immigration and emigration.

The Estate Tax Today

While the estate tax’s top rate for 40 percent seems ominous, the average tax rate that was paid in 2013 was only 16.6 percent, according to the Center on Budget and Policy Priorities. In fact, very few Americans would ever have to deal with the tax. According to the Joint Committee on Taxation, only two out of every 1,000 estates in 2015 will be subject to the tax. This is partly due to a merger of the gift and estate tax exemptions, which will result in a $5.43 million exemption per person for estates passed in 2015. Deductions for funeral expenses, certain charitable contributions, estate taxes paid to the states (15 states in total have their own estate tax) and inheritances to surviving spouses all make the paying of estate taxes a rarity.

While few may be subject to it in its current form, the estate tax brings up questions of wealth disparity, federal income necessity, and even that of morality. With estate tax revenue accounting for only 0.6 percent of total federal receipts for 2014, is the estate tax truly a necessity when it comes to economic prosperity?

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