Revised June 9, 2006
COST OF ESTATE TAX COMPLIANCE DOES NOT APPROACH
THE TOTAL LEVEL OF ESTATE TAX REVENUE
By Joel Friedman and Ruth Carlitz
It has been claimed that the costs of complying
with the estate tax are nearly equal to the total amount of revenue the tax
raises. While it is true that wealthy people devote considerable time and money
to sheltering their estates from taxation, there is no credible evidence that
compliance costs — including the IRS’ costs of administering the estate tax and
the cost taxpayers bear in terms of estate planning and administering an estate
when a person dies — carry a cost anywhere near the estate tax revenue yield.
- The cost of estate tax compliance is about
7 percent of estate tax revenues. In a detailed study, Rutgers University
law professors Charles Davenport and Jay Soled estimated all the various
public and private costs associated with estate tax compliance.[1]
The authors estimated that these costs represented about 7 percent of estate
tax receipts in 1999. An analysis by Duke University law professor Richard
Schmalbeck came to similar conclusions.[2]
Both of these
analyses relied heavily on surveys of lawyers and accountants involved in estate
tax planning. One of the key findings was that about half of the costs normally
associated with estate tax planning and administration would still be required
even if the tax were repealed. For example, activities such as selecting
executors and trustees, drafting provisions and documents for the disposition of
property, and allocating bequests among family members would still have to be
undertaken in the absence of an estate tax.
- Estate tax compliance costs are consistent
with the costs for other taxes. The estimates cited above put estate tax
costs in the same range as the administrative and compliance costs associated
with other taxes. For instance, in recent testimony before the House Ways and
Means Committee, University of Michigan economist Joel Slemrod stated that
administrative and compliance costs represent about 14.5 percent of revenue
for the individual and corporate income taxes.[3]
In another analysis, he indicated that compliance costs represent about 3-5
percent for value added taxes and 2-5 percent for the sales tax.[4]
Both Schmalbeck and Davenport-Soled conclude that the estate tax is an
“efficient” tax.
The claim that the cost of complying with estate
tax laws is roughly the same magnitude as the revenue collected is often linked
to a 1992 paper by the economists Henry Aaron and Alicia Munnell.[5]
At that time, Aaron and Munnell wrote that compliance costs represented a
“sizable fraction” of total revenue.
Opponents of the estate tax have frequently
exaggerated the implications of these findings, which reflected rough estimates
and were not based on the type of surveys that have informed more recent
analyses. Further, since the estimates were first made, estate tax revenue has
grown more quickly than estate planning costs, rendering the estimates seriously
out of date and of limited value for informing the current estate tax debate.[6]
Notably, Aaron
recently told the New York Times that he does not now believe that estate
tax compliance costs approach estate tax revenue. He also noted that both he
and Munnell “believe in principle that large transfers of wealth should be
taxed,” especially because the estate tax serves as a backup to the income tax,
levying tax on concentrations of wealth that might otherwise escape taxation
altogether.[7]
Aaron further
noted that modest increases in the estate tax exemption level, such as are
occurring under current law, sharply reduce the total compliance cost of the
estate tax. Already in 2006, the estate tax exemption has risen to $2 million
($4 million per couple) and in 2009 it will rise further, to $3.5 million ($7
million per couple). As a result, the compliance burden associated with the
estate tax will disappear altogether for a growing number of families each year
under current law. Internal Revenue Service data show that the number of
estates that filed estate tax returns between 2000 and 2003, a period in which
the exemption level rose from $675,000 to $1 million, declined by some 40
percent. As the exemption rises further, even fewer estates will have to file
an estate tax return or engage in other compliance activities arising from the
estate tax. Those estates that have sufficient wealth to be subject to the tax
under the higher exemption levels will still face considerable compliance costs,
but these costs primarily reflect the extent and complexity of their financial
affairs. Nevertheless, as part of a reform process, steps should be taken to
simplify the tax in ways that would further ease the compliance burden.[8]
End Notes:
[1] Charles Davenport and Jay A. Soled, “Enlivening the Death-Tax
Death-Talk,” Tax Notes, vol. 84, July 26, 1999.
[2] Richard Schmalbeck, “Avoiding Federal Wealth Transfer Taxes,”
Rethinking Estate and Gift Taxation, William G. Gale, James R. Hines, Jr., and
Joel Slemrod, eds., The Brookings Institution, 2001.
[3] Joel Slemrod, “Testimony Before the Committee on Ways and
Means Hearing on Tax Reform,” June 8, 2005.
[4] Joel Slemrod, “Which is the Simplest Tax System of the Them
All?” Economic Effects of Fundamental Tax Reform, Henry Aaron and William Gale,
eds., The Brookings Institution, 1996.
[5] Henry Aaron and Alicia Munnell, “Reassessing the Role for
Wealth Transfer Taxes,” National Tax Journal, June 1992.
6] See William G. Gale and Joel Slemrod, “Rhetoric and Economics
in the Estate Tax Debate,” National Tax Association Spring Symposium,
Washington, DC, May 7-8, 2001; Schmalbeck also reaches a similar conclusion.
[7] David Cay Johnston, “A Boon for the Richest,” New York Times,
June 7, 2006.
[8] For a discussion of various simplification proposals, see the
American Bar Association Task Force on Federal Wealth Transfer Taxes, “Report on
Reform of Federal Wealth Transfer Taxes,” 2004. |