Don't Cut the Estate Tax—Raise It
President Trump's plan will likely advocate for the repeal of a tax that only the ultra-wealthy pay.
I am not the first person President Trump or his economic team looks to for advice on tax reform. But if they wanted some, this is the free advice I’d give them: Don’t cut or eliminate the estate tax—raise it.
Repealing the estate tax—a tax on assets transferred from a deceased individual to their heirs—has become a staple cause among conservative Republicans. Eleven Republican candidates explicitly called for its elimination during the 2016 election. By calling it a “death tax,” and implying that it would hurt tens of millions of ordinary families, and force the sale of long-held family farms and family businesses, Republicans have successfully cast the estate tax as a ubiquitous and pernicious burden. That’s helped them win the public-relations battle over it so far.
The problem is that the main talking points that conservatives rely on when making this case are untrue. After years of looking, estate-tax repealers have not been able to come forward with even a handful of farms that, due to the estate tax, were forcibly sold off. And the notion that the estate tax somehow inhibits middle-class Americans from passing down savings to their heirs now, more than ever, falls somewhere between a hoax and a joke: The estate tax today kicks in at about $5.5 million for an individual, or $11 million for a couple. That means that there is a zero percent estate tax for every family estate under $11 million. A married couple that managed to save and leave $10.9 million to their children would not pay a single penny.
Even putting aside the claims used to galvanize support for cutting the estate tax, the Trump administration would be wise to consider that this might not be the time to go through with an expensive tax cut that only benefits a handful of America’s wealthiest families. This tax cut would coincide with the growing awareness of wealth inequality in the United States, where the top one-tenth of 1 percent have as much wealth as the bottom 90 percent. This inequality has only become more skewed in recent years. After substantial declines in wealth inequality from 1937 to 1977, the share of wealth going to the richest 0.1 percent has nearly tripled, from 8 percent in 1980 to 22 percent in 2012—the highest it’s been since 1917. This may not be the best political or economic environment to propose a tax cut that over 10 years gives $269 billion to only 5,000 of the wealthiest inheritors each year.
The facts do not even indicate that the 5,000 estates that pay some estate tax (out of 2.7 million deaths each year) are significantly burdened by it. While this mysteriously remains a top priority from some leading farm and small-business lobbies, the nonpartisan Tax Policy Center estimates that only 50 farms or closely-held family businesses in the U.S. will pay any estate taxes in 2017—working out to an effective tax rate of less than 6 percent on each of those estates. And while the 40 percent estate-tax rate might seem high to some, it’s only applied to the amount passed down beyond the $11 million per couple, leaving the effective rate much lower. Consider that the Tax Policy Center estimates that the average effective tax rate for estates meeting the tax threshold is 17 percent, and that even the rare $20 million estate that took advantage of no deductions, exemptions, or loopholes would not pay more than an effective rate of 18 percent. If the estate tax is repealed, large amounts of accumulated wealth would go untaxed forever. As Chye-Ching Huang and Chloe Cho of the Center for Budget and Policy Priorities have written, when it comes to the very wealthiest families in the United States, “unrealized capital gains account for a significant proportion of the assets held by estates.” Studies have shown that 55 percent of the value of estates worth over $100 million are never-taxed gains.
There is also is evidence that repealing the estate tax will be a tougher sell as more Americans come to understand how the estate tax really works. A prominent study published in the American Economic Review found that providing Americans with the facts about who actually pays such taxes raises support for increasing it. When the study’s authors told participants the threshold for the tax’s application, the number of Americans currently wealthy enough to have to pay it, and how unlikely they were to ever have to worry about it, support for a higher estate tax more than doubled. This is noteworthy since economists, including University of Michigan’s Joel Slemrod, have found that public opposition to the estate tax can be partially explained by misconceptions about who is subject to it.
The current case for repeal will be weaker if progressives come out in support of an estate tax that leaves the wealth of over 99 percent of Americans untouched and affects only the handful who want to leave eight-figure estates to their heirs. In 2008, as I finished a taping for a cable-TV show, a cameraman told me he agreed with everything I had said, except for my position on the estate tax. He dreamed of leaving his money to his children and didn’t want it to be taxed. I asked whether he would support a proposal that would allow him and his wife to leave up to $7 million to their children without paying any tax, and only tax people on the amount they left that was more than that. He didn’t hesitate to say he would.
Even if Trump and his team do not share my feelings about the unfairness of cutting the estate tax, pushing for this change could lose the support of voters who recognize that it is being prioritized over health-care protections or other types of tax cuts. For the $269 billion that it would cost the U.S. Treasury to give multimillion-dollar tax breaks to the 5,000 wealthiest estates each year, the administration could give nearly 27 million hardworking families a tax cut of $10,000 over the next decade. How could any member of Congress possibly argue that there was no choice but to cut Medicaid for millions of families, or say that it was impossible to afford the protections for pre-existing conditions or benefits like maternity care available under the Affordable Health Care Act, when they could afford nearly a quarter-of-a-trillion dollars to enhance the wealth of the already wealthiest Americans? On the other hand, if, as Hillary Clinton proposed, the president returned the estate tax back to the 2009 threshold of $7 million a couple—with a 45 percent rate on anything over that threshold—he would have an additional $160 billion in revenue to fund his other priorities without intruding on the aspirations of 99.5 percent of Americans to leave a nest egg to their children. Indeed, a September 2016 Bloomberg poll of high-income voters even found that 53 percent supported Clinton’s plan to broaden the estate tax to apply to individual estates worth more than $3.5 million.
Cutting the estate tax would do little to dampen accusations that Trump and his immensely wealthy cabinet are looking out more for the economic interests of their families and their financial peers than for typical working families. The likes of Senators Ted Kennedy and Jay Rockefeller showed that coming from a wealthy family doesn’t mean someone can’t be a champion for working America. But they proved that by fighting for a more progressive tax system that helped fund investments in workers, health care, and poor children. In Trump’s case, Americans would see him cutting investments for urban and rural America and threatening Medicaid, while (if he is as wealthy as he says he is) changing the tax code to save his family $4 billion, not to mention the savings for the rest of his cabinet.
Finally, there is the question of whether passing on huge amounts of untaxed wealth from generation to generation is consistent with long-held American values. President Theodore Roosevelt, in 1906, proposed a progressive tax on “all lifetime gifts and death-time bequests” for the direct purpose of limiting the amount of wealth that one person could transfer to another, thereby breaking up large concentrations of wealth. Three decades later, FDR echoed, “inherited economic power is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our government.” In 2001, Warren Buffett compared repealing the estate tax to picking the 2020 Olympic team from the first-born children of the 2000 team. Bill Gates Sr. has been one of the most eloquent advocates for the estate tax, recognizing that even those like his son, who’s often the richest person in the world, owe their success in some part to the investment and hard work of generations of Americans before them and thus have a moral obligation to pay forward a return to invest in the success of current and future generations.
Even with a modest estate-tax increase, the rest of Trump’s tax plan still seems on track to be too regressive. But increasing this tax is at least one way that the president could make his plan focus a bit more on helping the middle class and working poor. And, for what it is worth, he would be doing the right thing for his country.