Estate Taxation , Entrepreneurship , and Wealth

Since its introduction in 1916, the estate tax has been one of the most controversial parts of the United States tax code. Estate tax opponents dub it a “death tax,” claim that it hurts business activity and job creation, and assert that its negative effects are thus felt by all households, including those that never pay the tax. For these reasons, they call for abolishing it. In contrast, its supporters see the estate tax as an effective way to tax the richest (and dead) few and redistribute. They also point out that the abolition of the “death tax” on a small set of rich people implies a “birth tax” on all citizens. This paper measures the burden of effective estate taxation, and how it is distributed across the population using a quantitative, general equilibrium economy that explicitly studies entrepreneurial entry, continuation decisions, investment and job creation, and transmission of estates across generations. While calibrated to match some other key aspects of the data, this framework matches the observed wealth inequality and wealth mobility for entrepreneurs and workers, and replicates the observed consumption inequality. The fact that such a simple model does that well along all of these dimensions helps us trust the policy implications that it generates. This paper evaluates the effects of abolishing the estate tax under three alternative scenarios, starting with the one that casts abolishing it under the most favorable light, all the way to the least benign one. These scenarios differ because of the distortions introduced by the other policy instruments used to reestablish fiscal balance. The first tax policy raises no other tax, but cuts wasteful government spending as a fraction of output. Alternatively, under the second and third tax policies, the government keeps government spending as a fixed fraction of output and increases either the tax on consumption or the one on total income. We compute the steady states before and after abolishing estate taxes, the transition path of the economy between steady states, and the implied welfare costs and benefits of each reform. Estate Taxation, Entrepreneurship, and Wealth