Public Release: 

Repeal of estate tax to increase tax burden and widen wealth gap

American Sociological Association

WASHINGTON, DC--The federal government's most effective tool for reducing wealth inequality is the estate tax, but the tax is being phased out so that by 2010 the government will no longer collect taxes on the estates of the rich. Eliminating this important source of federal revenue, researcher Lisa A. Keister says, simply will create an economic burden for 98 percent of Americans to allow a tax break to the wealthiest 2 percent of the U.S. population.

Keister, an economic sociologist at Ohio State University, presents her research on the repeal of the estate tax in the winter 2003 issue of Contexts magazine, a highly accessible science journal of the American Sociological Association.

By 2011, the cost of the repeal is likely to approach $60 billion a year for the federal government and almost $9 billion for states. These revenues will be replaced presumably by employment or sales tax revenues.

"Although the debate about the estate tax revolves around issues other than inequality, both opponents and proponents of the estate tax have made inequality a central point in their arguments," asserts Keister. "Disparities in wealth ownership among racial groups are among the most extreme and persistent forms of inequality in the United states. In 1998, the median income of black households was about one-half that of the median of white households, but black households' wealth was only about one-eighth that of median white households' wealth. Because minorities are over-represented among the asset-poor, they are likely to be hurt disproportionately by repeal of the estate tax."*

Keister finds increased wealth inequality, especially among minorities, is not the only negative consequence of the repeal of the estate tax. It may decrease philanthropic giving by as much as 12 percent annually because with the current system, inheritance donated to a charity is not taxed and therefore is appealing to donors.

Although estate tax opponents and proponents "disagree on most claims about the estate tax, they do agree about the importance of wealth inequality," says Keister. "Unfortunately, discussion of the potential effects of the estate tax on wealth distribution has remained speculative. The data show that repealing the estate tax will indeed create more inequality, and this will be costly for most American families."

Opponents of the estate tax claim that the tax unfairly penalizes those who save, reduces incentives to work and targets small family businesses and farms. Proponents of keeping the tax argue that the tax is highly progressive, provides needed revenue to the government, bolsters non-profit industry, and catches those who avoid income taxes on capital gains. In the late 1990s, half of estate taxes were paid from estates valued at more than $5 million--families in the top 1 percent of wealth holders. The tax law also permits deductions for transfers to the surviving spouse, funeral costs, estate administration expenses, and charitable contributions.

Congress's intention for the estate tax was to create a mechanism to reduce inequality. Keister finds that while inequality is still on the rise, the estate tax does serve as a counterbalance. She developed a simulation of what wealth would have looked like if the estate tax threshold had not risen during the 1980s and 1990s. Using information about the way people accumulate wealth, such as how much families have in their bank accounts, the value of housing, and how these vary with income, education and other demographic traits, she examined alternative "what if" scenarios involving the estate tax. (The model is described in her book Wealth in America: Trends in Wealth Inequality.)

"I used the model to ask how wealth inequality would have changed during the 1980s and 1990s," explains Keister. Among her economic assumptions were that other events had happened as they did, but Congress had not increased the estate tax threshold beginning in 1980.

Keister found that the share of wealth owned by middle-class and poor families would have increased. She also found that by 1998, the top 1 percent would have owned 32 percent of the nation's wealth rather than the 38 percent they actually owned, and the top 20 percent would have held about 73 percent instead of 83 percent of the national wealth.

Strengthening the estate tax does not cause heirs of the wealthy to receive no inheritance or to become poor. Rather, the tax reduces wealth inequality. Therefore, Keister believes that repealing the estate tax almost guarantees that wealth ownership will become increasingly concentrated in the highest wealth sectors of the population.

* Keister points out the importance of distinguishing between wealth and income. Wealth is a person's net accumulation of assets and savings, but regardless of wealth, a person may have an income (i.e., the inflow of money over time) at any level, from low to high. Wealth expands the educational and occupational advantages of the wealth-inheriting generation and provides social and political influence that can translate into greater comfort, security, or wealth.


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