Estate Taxes, Labor Supply, And Economic Efficiency

By Douglas Holtz-Eakin and Donald Marples

For nearly a quarter of a century, the ACCF Center for Policy Research has sponsored pathbreaking research on tax policies to encourage saving, investment, and economic growth. As the Bush Administration and the U.S. Congress prepare to debate various tax reduction proposals, the Center offers this Special Report to focus the discussion on the economic impact of the estate tax.

The key conclusions of the paper are that the federal estate tax reduces the labor supply and personal saving and increases the cost of capital (the hurdle rate) for new investment. In addition, entrepreneurs are particularly hard hit by the estate tax as they face higher average estate tax rates and higher capital costs for new investment than do other individuals. Finally, the federal estate tax causes distortions in household decision-making about work effort, saving, and investment (and thus loss of economic efficiency) that are even greater in size than those from other taxes on income from capital.

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