A “study” claiming Congress can raise revenue by repealing the estate tax, which was criticized at length by Citizens for Tax Justice in 2009, has been updated to provide a “solution” for the budget deficit.
Anyone who is not familiar with tax debates might be wondering, quite reasonably, how repealing a tax could increase revenue. The answer is, of course, that it can’t.
One claim made in these reports, which are commissioned by the American Family Business Foundation, is that extremely wealthy people will simply spend away their fortunes if they know they will be subject to the estate tax after they die, but they will invest those fortunes if they know they will be untaxed after they die. In the latter scenario, their argument goes, the increased investment will boost the economy and result in increased profits and incomes, which in turn would lead to increased tax payments.
The reports ignore the fact that extremely wealthy people will save and invest most of their money in any event because there’s not much else they can do with it. In our 2009 report, we put the question this way:
Can extremely wealthy people really spend away their millions on expensive dinners and cruises? That’s a lot of dinners and cruises. In 2004 (the last year before the amount of estates exempt from the tax was increased), 72 percent of estate taxes were paid on estates worth more than $3.5 million. And 61 percent of estate taxes were paid on estates worth over $5 million… Let’s say you had this sort of money and you wanted to keep your estate from being taxed by the federal government. What would you do? You can’t put it in stocks or bonds or even a savings account. You can’t buy fancy houses, because they would become part of your estate. Even if you buy expensive cars or yachts, those would be part of your estate as well (even if they lose some of their value before you die).
You would have to spend your entire estate on caviar or cruises or cocaine or something that won’t be around after you die. It’s unclear whether anyone can eat away, cruise away, or snort up their nose $5 million.
This is just one of the many bizarre conceptual problems with the claims that estate tax repeal would result in increased revenue. For more, read the CTJ report.