UB Study Supports Congressional Efforts to Reduce/Repeal Estate Taxes

BUFFALO, N.Y. -- Higher estate taxes actually reduce the amount of tax revenue collected by the government and provide a disincentive for people to acquire more wealth, a study by economists in the University at Buffalo School of Management has found.

The study, recently published in the Family Business Review, supports ongoing Congressional efforts to reduce or repeal estate taxes by showing that federal tax revenue decreases when estate tax rates are raised and increases when estate taxes are lowered.

Moreover, the study concludes that individuals have historically responded to higher estate taxes by accumulating less wealth, either by putting less effort into wealth acquisition or by spending more of their money on tax avoidance plans to circumvent estate taxes.

"Why have a tax if it doesn't raise revenue or hurts the economy by giving people an incentive to reduce their savings?" asks Govind Hariharan, UB assistant professor of managerial economics and co-author of the study. "As this study points out, a tax that encourages people to reduce the amount of wealth they accumulate damages the economy and should be lowered or repealed."

Hariharan co-authored the study with Lawrence Southwick, UB associate professor of managerial economics, and Kenneth Chapman, associate professor of economics at California State University at Northridge.

The researchers looked for trends in individuals' response to higher and lower estate taxes by analyzing estate and gift tax as a percentage of the federal revenue and as a percentage of the gross national product from 1917, when the estate tax was instituted, through 1995. They also analyzed data from the National Longitudinal Survey of Labor Market Performance of Older Men to determine the effect of estate taxes on wealth accumulation during years that the estate tax was raised or lowered.

They found that in the years 1978-84, when estate taxes were raised, revenue from estate taxes decreased significantly at a rate of almost $947 million per year, as did estate tax revenue as a proportion of the GNP, from 0.37 percent to 0.16 percent. After the 1984 estate tax rate reduction, however, revenues rose at a rate of more than $630 million per year and estate taxes as a proportion of the GNP rose to 0.23 percent.

"This suggests that higher revenues from estate taxes are possible through lower rates," Hariharan says.

Correspondingly, the National Longitudinal Survey data of older men revealed that the net assets of 69-year-old men in 1995 dollars were higher before the 1978 estate tax increase and after the 1984 tax decrease. "Clearly people were responding to estate taxes in their behavior, and as a consequence, affecting the revenues generated for the federal government," Hariharan concludes.

The study, he says, supports contentions of tax reformers like Jack Kemp, who propose an estate capital gains tax and a tailored income tax to generate sufficient revenue without hurting growth.