Macroeconomic and Revenue Effects Of the Elimination of the Estate Tax

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, in order to focus the discussion on the macroeconomic impact of five different options for repealing or reforming the federal estate tax, offers this Special Report, based on macroeconomic estimates, prepared by Dr. Allen Sinai, president and chief global economist, Decision Economics, Inc.

The key conclusions of Dr. Sinai’s preliminary findings are that when his model of the U.S. economy is used, estate tax repeal or reform increases both real Gross Domestic Product (GDP) and U.S. employment, compared to the baseline forecast. In addition, there are more new business incorporations and greater potential output of goods and services. Finally, federal tax receipts rise in response to the stronger economy, feeding back approximately $0.20 per dollar of estate tax reduction, to some extent helping to pay for the estate tax reduction. In fact, one of the options, immediate repeal and elimination of step-up in basis, could increase total federal net tax revenues by $55 billion over the 2001–2008 period due primarily to the repeal of step-up in basis. ACCF Chief Economist Dr. Margo Thorning was invited to testify on the ACCF/Sinai study’s findings before the House Ways and Means Committee on March 21. Earlier, the study was released at a March 15 Senate Finance Subcommittee on Taxation hearing on death tax repeal and reform.

INTRODUCTION

The Sinai-Boston Econometric Model of the U.S. is a large-scale quarterly econometric model that includes considerable detail on aggregate demand, financial markets, sectoral flows of funds and balance sheets, interactions of the financial system with the real economy, and detailed trade and international financial flows. The advantage of a general equilibrium macroeconomic model instead of a partial equilibrium model for analyzing the impact of a change in the tax code is that a general model measures how the economy will respond after all aspects of the economy, financial system, inflation, and potential output are allowed to adjust to the new tax rates.

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