Magazine article Insight on the News

Transfer Taxes Sap Vitality from America's Economy

Magazine article Insight on the News

Transfer Taxes Sap Vitality from America's Economy

Article excerpt

The federal government levies taxes on transfers of property at death (the estate tax), property transfers during life (the gift tax) and transfers to grandchildren or more remote descendants (the generation-skipping transfer tax).

Referred to collectively as transfer taxes, they attract little interest in the public policy forum. One reason for the lack of interest is that these levies produce little revenue, only 1 percent of the annual federal tax haul. Another reason is that most Americans do not make taxable property transfers and hence have no firsthand experience with transfer taxes. However, transfer taxes have significantly adverse economic effects, grossly disproportionate to the tax revenue they generate.

Transfer taxes are the last in the series of federal taxes that unduly burden private saving and investment compared with consumption uses of income. Because of this, transfer taxes impose especially high economic costs on the nation in terms of lost savings and capital formation. The resulting economic dissipation can be expressed as the difference between actual levels of employment, real wages and total output and income and those that would have been realized in the absence of the transfer taxes.

The econometric model developed by Fiscal Associates Inc. of Arlington, Va., was used to simulate how the US. economy would have performed had the transfer taxes been repealed in 1971. The simulation results show that by 1991 the nation's gross domestic product would have been $46.3 billion higher, there would have been 262,000 more full-time equivalent jobs and the stock of capital would have been $398.6 billion greater than the actual amounts in that year. Moreover, the repeal of transfer taxes in 1993 would produce significant economic benefits by the year 2000: GDP would be $79.22 billion greater, 228,000 more people would be employed and the amount of accumulated saving and capital would be $630 billion greater than projected under present law.

Transfer taxes impose particularly heavy burdens on smaller, family-owned businesses, which are widely thought to be critically important vehicles for entrepreneurship. The valuation of such businesses at the death of the owner is often difficult and arbitrary, resulting in extremely high transfer tax rates.

Moreover, because of the high statutory rates of these taxes (a maximum of 50 percent now, to be raised to 55 percent according to President Clinton's budget bill), such businesses often must be sold to pay the transfer taxes that are imposed. …

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