It is generally agreed that the death tax brought in gross revenue of $28 billion in 2006 and will account for roughly 1.0% of the federal budget over the next three years. There is considerable disagreement, however, about how much potential revenue (through income and capital gains taxes) is lost due to reduced capital accumulation and heightened tax-avoidance measures.

For instance, though the estate tax may take $55 million from a $101 million estate (in 2011, with the $1 million exemption in place), it loses the capital gains on future investments of that $55 million, and on any income tax from individuals whose employment is funded by it. Moreover, it is very likely the death tax will take less than $55 million (after the $1 million exemption), as there are a host of tax-avoidance measures which reduce both the death tax revenue and the potential for future capital gains revenue.

The disagreement over the death tax revenue ultimately comes down to two different revenue estimating, or “scoring,” methods. Static scoring is a methodology that assumes that economic actors have a static response to changes in their overall tax burden. In other words, changes in tax burden will have no net effect on economic growth, and hence on future government revenues.

Dynamic scoring, on the other hand, takes into account the “feedback” effects that occur with changes in tax policy. Dynamic scoring recognizes that a higher tax rate takes money out of productive usage, lowering capital formation and the consequent economic growth that can raise both income and tax revenues. The latest economic data on the death tax’s revenue impact weighs heavily on the side of dynamic scoring.

Most, if not all economists, recognize that the estate tax reduces accumulated capital and encourages tax avoidance. The question is how much capital is lost due to the death tax. Dan Clifton, a former fellow with the American Family Business Institute, cited a study finding that the tax actually reduces more capital than it provides in revenue.

A recent study by the Joint Economic Committee (JEC) estimates the estate tax has reduced America’s capital stock 3.8 percent, or $847 billion. To put this in perspective, the tax itself generated just $761 billion (inflation –adjusted) over the same course of time. This suggests that the tax is providing a substantial drag on economic growth.

That loss in capital stock means less investment in new businesses, lower productivity (as labor productivity is tied to the amount of capital stock in an economy) and therefore lower revenues from both capital gains and the income tax.

David Joulfaian, writing for the U.S. Treasury’s Office of Tax Analysis, published a paper on the effect of the death tax over 50-years (1949-2001), Joulfaian noted that “estate taxes have a dampening effect on the reported size of taxable estates.” Specifically, Joulfaian found that the death tax results in a 14% decrease in the size of estates – before it is levied. That is to say, reported wealth in America for those subject to the death tax is 14% less than it would be without the tax.

This conclusion is further supported in a study by Kenneth Chapman, Govind Hariharan, and Lawrence Southwick, Jr. Based on evidence comparing significant death tax rate increases in 1941 and 1977 to lower rates in 1984, they found that the higher rates resulted in a smaller amount of taxable assets. The estate tax undoubtedly reduces the size of real wealth, decreasing other potential sources of federal revenue, such as the capital gains and income tax.

The CONSAD Research Corporation has provided an estimate of the actual revenue impact of permanent repeal. Taking into account the increase in income and capital gains taxes that would be generated by estate tax repeal, CONSAD found that repeal would result in a net revenue increase of $38.0 billion over the period from 2003 to 2012.

The death tax does bring in revenue, but the pitiful sum hardly makes up for the revenue lost through decreased capital and tax-avoidance measures. Repeal will not hurt federal tax revenues, and will in fact likely increase them.

4 U.S. Congress, Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 2007-2016 (Washington, DC: Congressional Budget Office, 2005), 84.

5. Cost and Consequences of the Federal Estate Tax,” Joint Economic Committee, May 2006

6. Dan Clifton, “Learning from History Part II: Federal Estate Tax Repeal will have no effect on the Budget Deficit,” American Family Business Institute, May 2006.

7. David Joulfaian, “The Behavioral Response of Wealth Accumulation to Estate Taxation: Time Series Evidence,” Office of Tax Analysis, U.S. Department of the Treasury, OTA Paper 96, (November 2005), 1.

8. Kenneth Chapman, Govind Hariharan and Lawrence Southwick, Jr., “Estate Taxes and Asset Accumulation,” Family Business Review9, no. 3 (Fall 1996): 267.

9. Wilbur A. Steger and Frederick H. Rueter, “The Effects on Government Revenues from Repealing the Federal Estate Tax and Limiting the Step-Up in Basis for Taxing Capital Gains,” (Pittsburgh, PA: CONSAD Research Corporation, 2003), 4.

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