Loyola University Chicago School of Law, JD 2019
As the president and the Republican Party inch closer to finalizing their proposed tax overhaul, one major proposed change is the repeal of the estate tax. The estate tax is a tax on an individual’s right to transfer property upon his or her death, usually to the individual’s surviving relatives or heirs. Currently, estates are taxed at a rate of 40% after the first 5.5 million. While the tax itself only impacts the wealthiest 0.2% of Americans, the inclusion or repeal of the tax in the Republican tax bill will affect Americans of all income brackets.
Modern history of the estate tax
For the 2010 Congressional Budget, the Bush Administration created generous exemptions to the estate tax, which famously benefited the heirs of Yankees owner George Steinbrenner, who had “the common decency to die in 2010.” This partial repeal meant that his heirs saved a tax on an estate worth approximately 1.1 billion dollars. However, the political upheaval caused by lost revenue forced Congress to reinstate the estate tax 2011.
Now, as President Trump states, the current GOP tax overhaul seeks to again remove the estate tax to help farmers and small business owners. However, in a contradiction thoroughly characteristic of the current administration, Trump’s own treasury secretary Steve Mnuchin admits the fact that the repeal of the tax is likely to only benefit the wealthiest 0.2% of Americans. With the announcement of a possible repeal, the value of the estate tax has again been called into question.
Benefits of an estate tax
The first benefit of the estate tax is the revenue the government stands to collect from large decedent estates. The estate tax alone generates more revenue than the federal government will spend on the FDA, the CDC, and the EPA combined. According to the Joint Committee on Taxation, repealing the estate tax would cost $269 billion over a decade.
Second, the estate tax is a tool in the government uses to prevent dynastic accumulation of wealth and reduce income inequality. Proponents of the estate tax argue that the revenue obtained from an estate tax is healthy for the long-term growth of the economy because it can be reinvested in the poorest segments of the population. In other words, since large inheritances play a significant role in wealth concentration, an estate tax would prevent the wealthiest of Americans from hoarding a significant portion of their wealth.
A third benefit of an estate tax is that it encourages charitable giving. Money given to charities counts as a deduction that can be used to reduce the amount of an estate subject to the tax. Therefore, wealthy taxpayers with significant estates are encouraged to make significant charitable contributions.
Proponents also argue that the estate tax is not as burdensome as those who seek its repeal suggest. Ultimately, even with the estate tax, the $5.5 million exemption plus various deductions means that the effective tax rate on the gross value of estates is well below the top statutory tax rate of 40%.
Unfortunately, the same forces that compel a taxpayer to make “charitable” contributions to take advantage of tax deductions encourages wealthy taxpayers to hide their wealth, which defeats the estates tax’s purpose. As Joseph E. Stiglitz partially predicted, taxing estates may increase inequality because a taxpayer will not save their money in the traditional sense; instead, they will convert their wealth into forms more leniently taxed. For example, wealth can be converted to stocks which are not traditionally subject to the estate tax. Money can then be borrowed against this investment. When the taxpayer dies and transfers her wealth to her heirs, they only need to pay taxes on the appreciated value when they sell it.
Along the same lines, a particularly troubling development is the fact that certain taxpayers will take their wealth completely out of the country to avoid tax. The Paradise Papers, perhaps the most important economic revelation of the past decade, show how the extremely wealthy, like the Queen of England, and multinational corporations like Apple and Facebook, all hide their wealth in off-shore accounts. This is troubling because despite what some claim, wealth is not created in a vacuum. The services, infrastructure and laws provided by a government and funded primarily by law-abiding taxpayers create the stable environment in which wealth is generated. When wealth is hoarded and taken out of the country, the investment made by governments and their constituents is not returned, and economies suffer. Greed aside, the most troubling aspect of this is the fact that this trend creates a new class of people whose wealth is unconnected to a country. Connected wealth can be tracked by regulatory agencies like the IRS. Without such regulatory oversight wealth can be easily used for criminal activities. Indeed, unconnected wealth cannot be easily tracked and can be used to fund harmful enterprises like terrorism or human trafficking.
The strongest argument against an estate tax is that it incentivizes prosperous taxpayers to make use of loopholes, like offshore accounts, to hide their wealth. Perhaps then the solution is not to remove the estate tax, but to close these loopholes. If the GOP cares about small business owners as much as the party line suggests, then its focus should be on preventing the extremely wealthy from avoiding their fair share of tax, and using the additional revenue to reinvest in the programs and infrastructure that truly help.