Distortion Costs of Taxing Wealth Accumulation: Income Versus Estate Taxes

Recently, attention has focused on the estate tax. To date, however, the debate over estate taxes has been nearly devoid of standard considerations of deadweight loss. We develop a framework for computing the deadweight loss of a revenue-neutral switch from an estate tax to a capital income tax, focusing on the potential lifetime behavioral responses in anticipation of paying the estate tax, while requiring relatively few parameters to estimate. We conclude that eliminating the estate tax and replacing the revenue with that from a capital income tax will likely enhance economic efficiency. Specifically, using our baseline parameter estimates we estimate that the mean decrease in deadweight loss is $0.018 per dollar of wealth. There is, however, considerable heterogeneity in the estimated impact. Importantly, our estimates are based on data that do not contain the 'super-rich' who are most highly affected by the estate tax.