Jon Kyl, June 5, 2006

As the Senate is scheduled to begin consideration of permanent repeal of the death tax, now would be a good time to revisit why it is crucial Congress eliminate one of the most heartless and economically counterproductive provisions of the U.S. tax code.

American families have a hard enough time dealing with the emotional pain and financial dislocations that come from the loss of a loved one. Why then should the government demand many of these families to pay death taxes at confiscatory rates, for assets that were already taxed when they were earned? This is especially galling when a family must sell the family business just to pay the taxes!

The confiscatory tax rate - 46 percent this year, dropping to 45 percent for 2007 through 2009, and skyrocketing to as high as 60 percent in 2011 - strikes most Americans as dramatically unfair even if the tax does not apply to them. A 2005 survey conducted by Global Strategies and Luntz Research found that 41 percent of respondents believe the death tax should be zero (or no more than the capital gains rate) while a full 70 percent said the rate should be no more than 25 percent. And a recent Gallup poll in April 2006 found that 58 percent of respondents said that the "inheritance tax" is unfair.

A 2004 Nobel laureate in economics, Dr. Edward Prescott of ASU, has studied the impact high tax rates have on a person’s willingness to work, save, and invest more. He found that high tax rates really do reduce one’s interest in working harder because the government takes a big bite of your dollar earned. In other words, the behavior that these high rates punish is entrepreneurship, building a business, providing for families, investing in our economy, and creating jobs.

The Joint Economic Committee of Congress (JEC) released a study recently on the costs and benefits of the estate tax. It found that the estate tax has had a tremendously negative effect on the economy by reducing its stock of capital by about $847 billion over the last 60 years. Over that same time, the estate tax raised $761 billion (in inflation-adjusted dollars). Because the estate tax is a tax on capital, it takes capital out of the economy and spends it for government purposes instead. As the JEC report says, "since capital is the fundamental ingredient for economic growth, the loss of such capital reduces economic output."

We must also consider who the estate tax hurts most. The "ultra-wealthy" can employ the best accountants and lawyers to help them avoid paying this death tax, and the amounts they spend on doing so barely make a dent in their overall wealth.

Not so far the small businessman or woman who works hard throughout life to make it a success. Or the farmer, who plows everything back into his operation and has substantial and expensive equipment, but little cash. Small, family-owned businesses, particularly manufacturers, often earn relatively low profit margins but are considered "wealthy" by the government because they own expensive production machinery or land. When the owner of such a company dies unexpectedly, the heirs are often forced to sell off the business to pay the death tax.

Recent advertisements alleging that repeal of the death tax would only benefit the "Paris Hiltons of the world," and would result in a trillion dollar deficit are wild and deliberate exaggerations of the truth. I believe that we should permanently lift this burden from the American taxpayer. I am leading the effort in the Senate to find a way to eliminate or substantially reduce the unfair impact of the death tax.

Senator Jon Kyl, a Republican, represents Arizona in the U.S. Senate. He serves on the Senate Judiciary Committee, the Finance Committee, and the Energy and Natural Resources Committee.