The first amendment to the US Constitution states, "Congress shall make no law respecting an establishment of religion." Yet, recent discourse indicates that the federal government has chosen a state religion — that of the ancient Greeks.
The Greeks believed that the mythological figure Charon was charged with the duty of collecting taxes from the dead in order to allow them to pass to their final resting place in Hades. Similarly, the federal government would like to assume the modern role of Charon, imposing an outrageous tax on individuals in exchange for allowing them to pass to the other side.
President Barack Obama has quietly included the largest increase in the death tax in American history in his 2010 Executive Budget. Under current rules, the federal death tax would disappear altogether in 2010. The Obama budget, however, would reinstate it at a permanent rate of 45 percent — which Nevada's Harry Reid insists must not be reduced.
Under the new rate, individuals would have to surrender nearly half of their accumulated lifetime savings to the government as a penalty for not living to pay annual income and other taxes. It's akin to a one-time buyout from the tax system wherein the government agrees to forego its future revenue stream from you in exchange for a lump-sum payment. It is interesting that under this paradigm, government officials regard the primary purpose and value of human beings as simply vehicles for the payment of taxes.
This notion is highlighted by the fact that the wealth confiscated through higher death-tax rates has already been taxed many times over. As individuals build up a store of wealth over their lifetimes, they pay income taxes, capital-gains taxes, property taxes and a variety of other taxes. As a result, the imposition of a death tax on the wealth left over when they die amounts to an egregious form of double taxation.
The most prominent victims of the death tax are often small or family-owned businesses and the employees who work at those businesses. The death tax requires that a specific percentage of the value of an individual's estate be remitted to the IRS in a cash payment. However, the assets of many individuals are not held in cash — and may, in fact, be ownership interests in a family business or farm. Hence, in order to pay the death tax, many families are forced to sell off the farm or family business — often putting their employees out of work.
Multiple econometric analyses have recently demonstrated the perverse impact of the death tax. The American Family Business Foundation has shown, for example, that elimination of the estate tax would yield $119 billion in additional GDP while labor income would rise by $79 million. In addition, small-business capital would increase by more than $1.6 trillion while 1.5 million new small-business jobs would be created — reducing unemployment by 0.9 percent.
To complicate matters further, a Joint Economic Congressional Committee study has suggested that the death tax may actually lower net government revenues because it leads to higher unemployment and, hence, lower income-tax collections. The lesson to be taken from this is that while the death tax does succeed in putting millions out of work, it fails to produce positive revenues for government.
The death tax has an even more adverse impact on the prospects for long-term economic growth. It discourages savings and investment in favor of current consumption. Because individuals are acutely aware that government bureaucrats will seize a sizable portion of their estates when they die, investments in capital goods such as factories, machinery and new technologies are displaced in favor of immediate exhaustion of their savings for consumer pleasures. While this spending is not inherently bad, policymakers should recognize that investments in capital goods boost worker productivity over time and lead to long-term growth. When policymakers encourage more spending on current consumption than would otherwise be the case through a death tax, they needlessly sacrifice long-term growth.
A death tax should never be an option for policymakers at any level of government. A 2007 survey by the Tax Foundation reveals that Americans largely consider death taxes to be the least fair form of taxation, with 67 percent of respondents calling the tax unfair. The tax fails to produce positive government revenues and creates a host of perverse economic incentives.
Clearly, it's time for policymakers at all levels of government to permanently abandon their Greek mythological ambitions.
Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute.