The federal estate tax, or so-called “death tax,” is defined by the Internal Revenue Service as “a tax on your right to transfer property at your death.” It is imposed on any and all life-savings, including:
- personal property (such as a home, cars, furniture, artwork)
- business assets (property, machinery, and inventory)
- investments (stocks, bonds, and real estate)
The estate tax taxes assets that have already been subject to federal payroll, income, and/or capital gains taxes. It is paid by the recipients of an inheritance – most often family heirs – and is due within nine months of the decedent’s death. If the heirs do not have sufficient cash to pay it, they must sell personal property and business assets in order to raise the necessary funds. Family business- and farm-owners are particularly hard-hit by this provision.
An estate tax was first imposed in 1797, to help collect funds for the Undeclared War with France, and was repealed in 1802. In 1862, an estate tax was imposed a second time to collect funds for the Civil War, and was repealed in 1870. In 1898 it was imposed again to raise funds for the Spanish-American War, and was repealed in 1902.
In 1916, an estate tax was imposed a fourth time -- to support U.S. involvement in World War I. But it was not repealed after the conflict had ended and has remained in effect since then. The initial rate was 10 percent, and later increased to 25 percent, and ultimately climbed as high as 77 percent.
In 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which reduced the estate tax from 55% in 2001 to 45% in 2009 and ultimately repealed the tax entirely on January 1, 2010. However, due to complex Senate budget rules, the EGTRRA tax relief was not permanent. The estate tax was slated to return one year later at a rate of 55 percent on all assets above a $1 million exemption amount, unless Congress were to vote against reinstating it.
The estate tax harms the American economy by reducing the stock of capital – the funds which businesses use to open new operations and create jobs. It does this in two ways:
- directly, by confiscating capital from businesses when the owners die; and
- indirectly, by forcing business owners to use complex and costly tax-planning strategies (such as paying for accountants or attorneys, purchasing life-insurance policies, and otherwise re-allocating capital) to reduce their death-tax liability.
According to the Joint Economic Committee, estate taxes reduced overall capital in the U.S. economy by $847 billion over a 10-year period. Alicia Munnell, an economist formerly with the Clinton administration, found that the compliance costs associated with the estate tax are nearly equal to the federal revenues it raises – roughly $24 billion in 2008 alone.
Adapted from this page, this page, and this page at NoDeathTax.org.