Everyone in Washington, D.C., who works on taxes is consumed with one area or another of reform: international provisions, the corporate rate, full business expensing, the spread between the top personal and corporate rates, etc. All of these — and many others besides — are vital parts of comprehensive tax reform. But there’s one area that’s rarely mentioned, despite its economic importance and despite the fact that it’s a deeply immoral blot on our system that 70 percent of Americans want gone for good: the death tax.
The fiscal cliff and its legislative aftermath created a “new normal” in the death-tax world. The new permanent top rate for the death tax is now 40 percent (down from 55 percent in 2001, but up from a temporary 35 percent in 2011 and 2012). It’s also permanent law that the death tax “standard deduction” is $5 million for singles and $10 million for married couples. These numbers will grow with inflation.
As a result of these very high exemption levels, the death-tax issue has fallen off the political radar screen in Washington. That’s a mistake, especially for conservatives who know that the death tax is a redundant, jobs- and growth-killing tax on savings. In an October 2011 study, Reagan economist Steve Entin (now at the Tax Foundation) estimated that full death-tax repeal would increase economic output (relative to today’s levels) by nearly $1 trillion over the following decade. This extra economic growth would increase net federal tax revenues (again, relative to today’s levels) by nearly $150 billion, even after accounting for the lost death-tax revenue.
Business owners and employers who have to comply with the death tax are all too aware of what steps they must take to avoid it. They have to contract with life insurers, accountants, actuaries, charities, and others to provide for a complex web of estate-tax planning. They have little choice, since the alternative is for their heirs to lay people off or sell family businesses to pay the death tax. The “services” provided by these industries come at a heavy cost. Billions of dollars per year that could go toward creating jobs and growing the economy instead goes to death-tax-avoidance strategy fees.
The good news is that repealing the death tax is easier than ever for tax reformers. According to the latest numbers from the Congressional Budget Office, aggregate death-tax revenues over the next decade are projected to come in at slightly less than $200 billion. This sounds like a lot of money until it’s compared with the expected total federal tax haul in that period, nearly $41 trillion. That’s right — the death tax is going to be responsible for less than one-half of one percent of all federal tax revenues going forward.
This means that repealing the death tax should be a top concern of both the House Ways and Means Committee and the Senate Committee on Finance as they craft tax-reform proposals. There should be plenty of money elsewhere in the tax system to be had to repeal the death tax in a revenue-neutral way. As Entin has pointed out, a more realistic score would indicate that repealing the death tax is actually a net revenue gainer for the government, but even the handcuffs of a static score should not be too large a problem to work around.
Of course, the death tax could be repealed outside of comprehensive tax reform, and spending cuts could be used to appease the government bean counters. Whereas the death tax will yield only $200 billion in revenues this decade, CBO projects that the government will spend in that same time period $4.4 trillion on Medicaid, nearly $1 trillion on Obamacare insurance exchanges, nearly $800 billion on food stamps, and $6.6 trillion in defense spending. Somewhere in there (or elsewhere in the $47 trillion the government will spend) there are surely enough spending reforms to pay for repeal of the death tax on a static basis. We all know that the actual effect of death-tax repeal will be more robust economic growth resulting in higher tax revenues, so these spending cuts would merely be a bonus for conservatives.
The bottom line is that death-tax repeal needs to be a top priority for pro-growth, supply-side conservatives in a post-Obama fiscal future. It’s right up there (or should be) with consensus priorities such as those mentioned above. Any and all good ideas should be on the table, debated, and ultimately acted on. Representative Kevin Brady (R., Texas) and Senator John Thune (R., S.D.) will soon introduce full death-tax-repeal legislation.
For the first time in a long time, killing the death tax — a conservative tax policy goal for several generations of taxpayer activists — is within reach. Now is the time to seize this opportunity. Conservatives should not let it pass.
— Grover Norquist is president of Americans for Tax Reform. Follow him on Twitter at @GroverNorquist