One must emphasize here the prefix micro in microcosm. Revenues from the estate tax, which only applies to inheritances worth more than $5.5 million, will account for about $20 billion this year in federal revenues. That’s approximately one-half of 1 percent of the Treasury’s annual haul. Compared to total federal spending, it’s nothing.
But compared to nothing, it’s $20 billion. And the tax code is more than a ledger. It is a national statement of values. And so this little law inspires a great commotion during each tax debate. To its opponents, it is the ultimate (literally) punishment on success and an affront to the family legacy that each striving individual hopes to leave. To its supporters, it is a necessary bulwark against inherited plutocracy, which offends the national virtue of merit over privilege.
To understand the estate tax’s current fragility, start with its history. The practice of taxing upon death is almost as old as recorded history itself. Nearly 2,000 years ago, the Roman Emperor Augustus imposed the Vicesina Hereditatium, a tax on the wealthiest Roman estates upon the death of their patriarch. What’s often considered the first such tax in the U.S. was levied in 1797, when the U.S. required federally taxed stamps for all probates and wills. For the next century it was used off and on as a source of emergency revenue during wars and other times of crisis.
The modern estate tax was born in 1916, alongside the federal income tax. Except during the 1930s, when several tweaks to the law increased its share of federal revenue, its contribution to the Treasury has been extremely consistent, always hovering around 1 percent of federal taxes.
Estate and Gift Taxes as Share of Total U.S. Revenue
The law has faced occasional resistance but few serious attempts at repeal. But starting in the 1990s, conservatives mobilized to end the tax for good. A widely cited 1994 study from the right-leaning Tax Foundation reported that it discouraged entrepreneurship. Meanwhile, Republicans worked aggressively to end the estate tax, finding purchase in two arguments against it.
First, they rallied around the moniker “death tax.” This succeeded in persuading many Americans that the law threatened upper-middle-class families. In a 2001 Gallup survey, 17 percent of Americans said they feared they owed estate taxes, at least eight times higher than the actual figure. From a marketing perspective, this was quite brilliant.
From a descriptive standpoint, it was quite misleading. To the extent that the estate tax is a “death tax,” it is the least effective tax ever devised—not because it fails to discourage death, but because it fails, even more basically, to tax it. In 2013, 2.6 million people died. Fewer than 5,000 of them had taxable estates. That means, each year, the so-called death tax fails miserably in its job, missing more than 99.8 percent of the year’s deaths.
Second, Republicans have for two decades found it useful to claim that the law hurts independent farmers, presumably because this makes it seem like the tax is striking at the nation’s traditional agrarian heart. This past week, Gary Cohn, the White House chief economic adviser, made an impassioned plea that the estate tax holds a special cruelty for America’s farms. “You have a family farm that’s big enough that it’s going to hit the estate tax, you start paying lawyers, consultants, and accountants to break up your land, and break up your farm,” he said.
The idea that the estate tax is destroying the lives of thousands of ordinary family farmers is an urban legend (or, technically speaking, a rural legend). When I called up Len Burman, an economist at the nonpartisan Tax Policy Center (TPC), to ask if Cohn were making any sense, Burman assured me that he was not. “If Cohn were trying to make a parody of the rich people’s argument for the estate tax, he couldn’t have done a better job,” Burman said. In the early 2000s, the American Farm Bureau Federation failed to name a single example of a farm lost to the estate tax. This year there are fewer than 100 farms in the U.S. that will owe any estate tax in the U.S., according to TPC estimates. Their average tax rate will be approximately 6 percent.
There are, however, some reasonable conservative arguments against the estate tax. The first is it’s a tax on thrift. Imagine two people who each earn $20 million in their lifetime. One spends everything on Ferraris, pieds-à-terre in nine different countries, and a garish taxidermy collection. The other lives a relatively humble suburban life, drives a Prius, and saves millions of dollars for his kids and grandkids. The Prius driver would end up owing more in estate taxes, and it seems cruel to punish any family, rich or poor, for this sort of planning.
What’s more, it’s reasonable to complain that the estate tax functions as a double tax. A person might pay payroll and income taxes on earnings and then pay inheritance tax on the savings left behind. The important caveat to this, however, is that about half of the largest inheritances are capital gains held until death that have not been taxed. Also, the heirs of the estate are paying tax on the bequest once.
Finally, it’s pretty common for most families close to the threshold to escape the tax, by gifting money to children, grandchildren, and spouses, deducting large charitable contributions, and protecting some of the assets in trusts. In fact, there are so many ways to avoid the estate tax—and there is so much energy expended by rich families to avoid it—that the best argument against the tax might be that it stimulates a lot of unproductive work hiding posthumous assets from the federal government.
But the arguments for the tax are far stronger. First, while it stimulates lawyer and accountant fees, it seems to stimulate charitable giving even more. A 2004 report by the Congressional Budget Office found that eliminating the estate tax would reduce charitable giving by up to 12 percent, which would be the equivalent of about $4 billion in 2018.
Second, anybody who believes in equality of opportunity or the dignity of work should worry about the impact of America’s plutocratic class relying on the untaxed inheritance of their parents. Over 100 years ago, Andrew Carnegie famously asserted that the worst thing a rich man can do to his children is to bequeath a large inheritance, because it transforms them into slothful layabouts. The claim, now known as the Carnegie Conjecture, might seem backward. After all, large inheritances tend to come from rich, well-connected parents whose children have better access to excellent schools and professional networks. But a 1992 paper whose lead author was the economist Douglas Holtz-Eakin found that people with an inheritance of over $150,000—or, in 2017, about $270,000 in inflation-adjusted dollars—are four times more likely to leave the labor force than someone with an inheritance of just one-sixth that size. A large inheritance doesn’t turn every heir into a high-class loafer. But it does seem to encourage more high-class loafing.
Third, in a period defined by the rising gap between rich and poor, one cannot ignore the enormous role played by inheritance in sustained economic inequality. According to analysis by Matt Bruenig, a writer and the founder of the advocacy group People’s Policy Project, four out of 10 members of the wealthiest 1 percent inherited some money, with an average inheritance in the millions of dollars.
There is nothing wrong with earned success and wealth, but each developed country is responsible for finding the right balance between rewarding achievement and protecting the lower income. In the last half century, the average wealth of the bottom half has gone from about nothing to about $1,000 in debt. Meanwhile, the returns at the top have accelerated. In the 1960s, families in the top 1 percent were six times wealthier than families in the middle, according to the Urban Institute. By 2016, the 1 percent was 12 times wealthier than the typical family. As wealth inequality has soared, the estate tax has been diminished, with the number of estate tax returns declining by 76 percent between 2006 and 2015. There is little doubt that 21st-century tax policy has assisted the concentration of wealth.
A stronger estate tax combined with tax benefits to lower-income households with children would instead democratize opportunity. Conservative politicians like Paul Ryan have spoken eloquently about the need for any strong economy to provide young Americans with equal opportunities. It is simply impossible to imagine how killing the estate tax, the single most progressive element of the U.S. tax code, brings the nation any closer to meritocracy.