We Tax Dead People

Joel B. Slemrod and William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

June 12, 2000


In discussing the Stamp Act passed by the British Parliament on March 22, 1765, Benjamin Franklin famously asserted that “in this world, nothing is certain but death and taxes.” More than 200 hundred years later, and recent advances in corporate tax shelters and cryogenic prolongation of life notwithstanding, Franklin’s assertion remains uncontroversial. However, the decision to impose taxes that depend on death is a policy choice, not a certainty.

The idea of making death a taxable event, or a lucrative event for tax collectors, infuriates some people. Winston Churchill called estate taxes an attempt to tax dead people rather than the living. Steve Forbes campaigned in favor of “no taxation without respiration.” Economist Bruce Bartlett points out that a key plank in the Communist Manifesto was the abolition of inheritance rights. In economic terms, the estate tax is alleged to reduce aggregate capital accumulation, wages, jobs and economic growth; destroy small businesses, farms and the environment; treat frugal households unfairly compared to spendthrifts; and require an army of attorneys that generates huge compliance costs and ingenious avoidance strategies.

On the other hand, others might feel entitled to ask what all of the fuss is about. The tax is levied on the estates of fewer than 2 percent of Americans who die. It raises less than 2 percent of federal revenues—less than the federal tax on gasoline. Under current law, with minimal planning, a married couple with wealth of less than $1.35 million need pay no tax upon death, rising to $2 million by 2006. In addition, taxpayers can make significant amounts of tax-free gifts to their descendants, and unlimited gifts to non-profit organizations. Special provisions generously address the needs of small businesses and farms. As a result, half of estate and gift tax payments are made by decedents with estates in excess of $5 million, who account for only 1 out of every 1,000 deaths in the United States. Thus, supporters argue, the estate tax is a progressive and relatively cost-effective way to raise revenue. In addition, the tax may have other social benefits as well, by breaking up large concentrations of wealth and encouraging giving to charitable causes.