At 45% of estate value, the U.S. has the second highest death tax in the world, and is part of an increasingly small gang of countries (24) which still have a death tax.

While countries such as Singapore have eliminated their death tax and others such as France, Finland, Hungary, and Jamaica are considering repeal or significant reduction, the U.S. death tax is set to climb to 55% - the highest death tax in the world – in 2011. Allowing this to happen is the wrong way for the U.S. to stand up for its entrepreneurs and family business owners.

The death tax is a form of double taxation in that it taxes assets which have already been subject to the federal payroll, income and capital gains taxes. Moreover, it is a tax on capital, which means the burden falls solely on those who successfully build and maintain wealth (rather than spending it away). Even worse, the death tax falls particularly hard on family-business owners and farmers.

Family-business owners and farmers may have considerable capital assets in the form of property, business equipment, productive land and livestock, but often have little or no cash. This means that their “wealth” (on-paper) may be very large, making them liable for a hefty death tax bill. However, without cash, they are forced to sell some of their property to pay the tax. For many family-business owners and farmers, selling even a fraction of their business or farm makes it less competitive and unprofitable, forcing the ultimate sale of the entire operation.

In our death tax tales, we document multiple instances of this very tragedy. Consider Victor Mavar of Louisiana, who sold his seafood processing and pet-food manufacturing business due to death tax payments. Another is farmer Gary McCall of Iowa, who nearly lost his farm when his father died, and who is unsure as to how he can save it for his son. These stories give just a glimpse of the social and economic havoc of the death tax.

Researchers at the Heritage Foundation have calculated that 300,000 jobs are lost due to the death tax.¹ A leading economist, Alicia Munnell, has stated that the compliance costs (such as paying for an accountant or attorney) of the death tax is nearly the same as the revenue it raises. In other words, the tax imposes a burden on the economy that is twice as large as the federal revenue it raises². This makes the death tax the most costly tax in existence.

The case for death tax repeal is clear. It is time for Congress to take appropriate action and end this unjust tax once and for all.

Common Misconceptions

There are a number of arguments made by opponents of death tax repeal. Most of these are ideologically driven, and all are based on a poor grasp of the facts and economic reality. In the following paragraphs you will find a basic overview of the most common misconceptions, with links to more in-depth studies.

Effect on Federal Revenue

MISCONCEPTION: The death tax is an important source of federal revenue provides substantial revenue and that eliminating it would result in a larger deficit.

TRUTH: Death Tax repeal would have no effect on the federal deficit.

The problem with this misconception is that it considers only the gross revenue by the tax, while ignoring the effect that the death tax has net tax revenues from other sources, such as the income, payroll and capital gains tax. The death tax takes a one-time revenue of 45% (soon to be 55%), which can never again be taxed by income, payroll or the capital gains taxes. By taking into account the full “net” effects of the death tax, the CONSAD Research Foundation found that repeal would result in a net revenue increase of $38.0 billion over the period from 2003 to 2012³.

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“No Family Farm Lost”

MISCONCEPTION: No family farm has been lost due to the death tax.

TRUTH: It is a documented fact that many family farms have been sold to pay the death tax.

This misconception is based on the notion that if you can’t find a tax-return showing that the farm was sold to pay the tax, then no farm has been lost. This is analogous to arguing that if you can’t see the wind, you can’t be sure that it is responsible for blowing an object through the air.

Many farmers recognize the looming death tax long before they die, and realize that their children will be left with a large burden that will be difficult for them to pay. Rather than leaving their children to sort out the mess, many farmers sell the farm before they die, providing their heirs with usually enough income to pay the tax. Hence, though the death tax certainly leads to the sale of the farm, it is not always possible to establish the link at first blush.

Even when the farm is sold after death, it often is held for several years, while the family struggles to come up with means to pay for it. Loans are obtained and productive land is sold in a last ditch attempt to hold the majority of the farm together. Only when the family realizes that their own livelihood can no longer be sustained, is the farm finally sold. Though these stories have been told by countless farmers (see Death Tax Tales), the ideological opponents of death tax repeal choose to ignore them rather than paying attention to the facts.

The fact of the matter is that thousands of farmers are asset rich, but cash poor. Their heirs will be placed in a considerable bind when the death tax comes due. Even when they are not forced to sell the farm, the death tax places an unjust burden on their livelihood.

Charitable Contributions

MISCONCEPTION: Repeal of the Death Tax would result in less total charitable contributions, due to the charitable exemption loophole.

TRUTH: Repeal of the Death Tax would allow people to do as they wish with more of their personal income, and very likely would increase charitable giving.

Concern about charitable contributions is probably the most honest complaint raised by opponents of repeal. After all, personal death tax liability is reduced by making charitable contributions. However, charitable giving is also motivated by non-material considerations and to fully comprehend the effect of the death tax on total charitable giving, these considerations must be taken into account. Studies have found that the spiritual-moral-altruistic motivations for giving are the most significant factor in giving. In fact, a Boston College survey of donors found that wealthy Americans would give 10% more to charity, on average, absent the death tax.

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Income Inequality

MISCONCEPTION: The Death Tax is necessary to reverse “income inequality” by confiscating the life-earnings of the “rich” and redistributing it to the “poor”

TRUTH: Income is highly mobile in America and the Death Tax is more likely to prevent the poor moving up the ladder than it is to break up any “monopoly” of wealth.

This misconception comes from a failure to distinguish between economic unfairness and the reality that increasingly more Americans are becoming wealthy. While there is a “wealth divide” in America, it is a highly fluid divide. People who are poor and middle-income are constantly moving up, while the rich rarely stay at the top for long. This is due to the fact that America’s “pie” is constantly growing – offering opportunities and income to more and more people at greater and greater levels. A recent Treasury Department found that over the last 10 years, over half of the lowest income earners have moved up into a higher income bracket. Moreover, a Clinton administration economist found that inheritances may in fact help to reduce inequality.

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1. William W. Beach and Rea S. Hderman, Jr., State-by-State Estimate of Jobs Created by Repeal of the Federal Estate Tax, The Heritage Foundation, May 31, 2006.

2/ Alicia H. Munnell, “Wealth Transfer Taxation: The Relative Role for Estate and Income Taxes,” New England Economic Review, Federal Reserve Bank of Boston (November/December 1988): 19.

3. 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.

16. “Income Mobility in the U.S. from 1996 to 2005,” Department of the Treasury, November 13, 2007, http://www.treas.gov/offices/tax-policy/library/incomemobilitystudy03-08revise.pdf.