Federal Estate Tax: Pros and Cons

Until a few years ago, there was little discussion over whether the estate tax was a proper mechanism for the Federal government to raise revenue.  Recently, there has been much debate by both Democrats and Republicans as to whether the estate tax should be repealed, as some believe the estate tax exemption is too high, and the rate structure should be more progressive with rates substantially higher than 40% on taxable estates over certain levels. 

The following are the key reasons those opposed to the Federal estate tax give for repealing it:

• Individuals will save less because they do not want their estates to be subject to the tax.
• The tax will slow business activity because a decedent’s heirs will have less to invest. 
• Revenue raised through the estate tax is less than one percent of tax revenue raised annually, and the amount raised is partially offset by high expenses incurred by the government in collecting it. 

The following are key reasons those in favor of the Federal estate tax give for keeping it:

• The estate tax can help reduce the concentration of wealth in just a few hands.
• It is estimated that less than 2/10 of one percent of decedents dying each year will be subject to the tax. 
• Most individuals concerned with putting as much wealth as possible into the hands of their heirs will try to save more, and not less, if there is an estate tax.

See Bob Rywick, Pros and Cons of the Federal Estate Tax, Forbes, Oct. 6, 2014.