American Family Business Foundation, Estate Taxes, Deficits and Budget Implications, by Stephen J. Entin:
This paper reveals that lower estate taxes actually reduce more of the deficit over the long-term than do higher estate taxes, making an increased estate tax one of the worst policies the Super Committee could adopt. Unfortunately, efforts to eliminate or reduce the estate tax are being held hostage.
Federal revenue estimators show the tax as contributing revenue to the Treasury, and report that reducing or eliminating the tax would raise the deficit. They get this result by assuming no change in the economy as a result of the estate tax reduction, ignoring the economic gains that would accrue.
In reality, the estate tax is so destructive on investment and employment that it reduces federal revenue over time by eroding the tax base. Our report takes this into consideration by applying a model of the estate tax’s effect on capital formation, GDP, wages, and other income to calculate the budget effect of reducing the tax, allowing for the increase in GDP and other revenue. We find that:
- Elimination of the tax would increase the level of GDP by about 2.26% by 2021, or $538 billion in that year alone compared to current law.
- From 2012 through 2021, the cumulative gain in GDP would be close to $3 trillion.
- Instead of increasing the federal deficit by 6.54% over the period, it would reduce it by 5.19%.
- Repeal would cover 30.18% of the $1.2 trillion in deficit reduction being required of the Super Committee by 2021.
Center on Budget and Policy Priorities, Supercommittee Should Reject “Dynamic Scoring” Estimates Are Uncertain and Subject to Manipulation:
Some members of the Joint Select Committee on Deficit Reduction (the “supercommittee”) are reportedly considering, and now Senate Finance Committee Republicans are recommending, the use of “dynamic scoring” to estimate the budgetary effects of tax proposals.
The Joint Select Committee should reject the temptation to use “dynamic scoring,” which, in this case, would include estimates of how changes in tax policy would generate changes in the overall economy — such as, the size of the economy as measured by gross domestic product (GDP).
Contrary to the widespread misunderstanding among policymakers and others, the standard estimates of tax and spending proposals that the Congressional Budget Office (CBO) and other federal agencies prepare are not “static.” They incorporate many changes in individual and business behavior that occur in response to changes in tax rates and other policies.
They do not, however, include estimates of “macroeconomic feedbacks.” That is, they do not attempt to estimate whether, and by how much, a change in tax or spending policy would affect the overall economy. They do not, for instance, include estimates of how a proposal would affect GDP growth and, therefore, do not include an estimate of how any change in GDP would affect revenues.
