Public policy, of course, should not be based on back-of-the-envelope calculations. It should be based on reliable, verifiable data.
So my colleague, Cameron Smith, and I have run the numbers, examining several different political options, from repeal of the estate tax to a return to the 2001 rate (55% on estates valued over $1 million), which automatically will happen in 2011 if Congress takes no action.
Here's what we found.
In a study we recently conducted for the American Family Business Foundation, in which we analyzed the reactions of small businesses to past tax changes, we found that eliminating the estate tax would increase the climate for wealth accumulation, ultimately increasing wealth in the United States by $1.6 trillion. Small-business investment would rise by more than 3% annually. That in turn would increase small-business payrolls by as much as 2.6%, adding roughly 1.5 million jobs to the economy, or nearly half the number President Obama hopes to save or "create."
Conversely, if the estate tax is permitted to revert in 2011 to its 2001 level, investment will decline and payrolls will likely fall by nearly 1%, which means about 500,000 jobs will be sent to the chopping block.
Although no one can predict with exact precision how many jobs would be created or lost, we do know exactly how the estate tax affects the economy systemically. Higher rates discourage investment, impede growth and slow job creation. Lower rates have the opposite effect.
We also know that the tax, for all of the heavy breathing on both sides of the fence, produces very little revenue: never more than 1.3% of federal tax receipts since 1965, and less than 1% of federal receipts in 2007. The income tax, by contrast, produces 50 times the amount.
If lawmakers are really concerned about creating jobs, eliminating the estate tax would be a sensible next step.
