Like presidential candidate Donald Trump's tax plan, the tax reform blueprint released recently by House GOP members would repeal the estate tax as well as the generation-skipping transfer tax.
Other measures in the House GOP plan include consolidating the current seven tax brackets to three and lowering the top individual income tax rate to 33%. Going forward, the income tax brackets would be indexed for inflation.
The blueprint also repeals the Alternative Minimum Tax, which the House GOP calls "a second tax system," and promises to retain the current tax incentives for retirement plans while creating "more general savings vehicles" called Universal Savings Accounts.
Presidential candidate Hillary Clinton has proposed reducing the estate tax's exemption and slightly increasing its rate, from 40% to 45%, which would increase the "distortionary incentives" of the tax, reducing economic output, but also increase the revenues from the tax, according to a recent analysis by the Tax Foundation, a think tank that supports a simpler tax code.
The Tax Foundation report notes that the estate tax, currently 40% for estate value above $5.45 million, accounts for less than 1% of federal revenue and applies to only a few thousand households annually.
For every dollar's worth of wealth saved above $5.45 million, a taxpayer can only pass along 60 cents, the Tax Foundation notes, which creates "a disincentive to save money above that amount, and encourages alternate options, such as spending it immediately on consumption goods."
The House GOP and Trump's plan to eliminate the estate tax would, according to the Tax Foundation, "have a first-order effect of decreased tax collections, but also a second-order effect from increasing the capital stock."
Eliminating the estate tax would cause "a reallocation of economic production from consumption goods to capital goods, relative to current levels. On the whole, the equilibrium level of capital investment in the economy would be 2.3% higher, which would boost productivity by 0.7%," the Tax Foundation notes. "As a result of the higher productivity, workers would be incentivized to work somewhat longer hours, increasing labor force participation by the equivalent of 159,000 full-time jobs."
Other effects of getting rid of the estate tax include a decrease in federal revenue by $240 billion over 10 years, the Tax Foundation adds. However, "the macroeconomic impact of the estate tax elimination would include increased wages and incomes, which would increase the receipts from other taxes."
After taking this into account, the report states that "the total revenue loss from estate tax elimination would be only $19 billion total over 10 years."
Taking the estate tax back to 2009 levels by requiring an exemption of $3.5 million and a rate of 45% as proposed by presidential candidate Hillary Clinton would "have a first-order effect of increased tax collections, but also a second-order effect from reducing the capital stock," the Tax Foundation notes.
