Thoughts on Rounding Errors and Estate Taxes

Yesterday I wrote a longish post on how raising federal taxes on the "rich" can't possibly close the budget deficit.   In the process, I happened upon the following data about the revenues of the federal government derived from the federal estate tax:

Year                            Amount of Estate Tax Collected (billions)

2005                             $24.8
2006                             $27.9
2007                             $26.0
2008                             $28.8
2009                             $23.5
2010                             $18.9

Now, I'm against the estate tax morally as a "death tax," because I think it's shameful for the government to confiscate a significant portion of someone's life savings at their death, when they've already paid taxes on those savings once (when income was earned) or twice (on capital gains when investments purchased with prior income are sold).   We should encourage people to save so that they can leave money to their children, not punish them for it.  

But put that aside.   What I noticed yesterday, which surprised me, is just how small a portion of the $2 trillion plus in federal revenues come in through the estate tax.   It was less than 1% in 2010, and just over 1% in prior years.    In other words, it's a rounding error in the government budget; if the government had to follow GAAP, it wouldn't be "material."  

So what is the purpose behind even having such a tax?   Punishing the wealthy?   Certainly there's an element of that, at least in the Democrats' rhetoric.   But the real purpose, I believe, can be found in the vast, layered tax avoidance industry of lawyers and accountants and investment advisors and tax advisors and trust companies and trustees that has sprung up around the estate tax.   If it didn't exist, hundreds of thousands of white collar professionals would have to look for new jobs.   If the estate tax didn't exist, in other words, they would have had to invent it.   And, in a sense, through lobbying and legislation, they did.

In short, the estate tax is just another example of how the diversion of our intellectual capital as a nation from productive work (designing, inventing, building, manufacturing real things) to paperwork (law, accounting, finance) has debilitated us.    I count myself among the many who might have done something different with their lives.