Why Do We Have an Estate Tax ?

The Estate Tax Debate We Shouldn’t Be Having
It affects few Americans and does more good than harm. Let’s hope the next president focuses on more important issues.
Bloomberg, September 12, 2016

Greg Mankiw, the Harvard professor and former adviser to President George W. Bush, has called for abandoning the estate tax. His argument, supported by anecdotal evidence and some wonky explanations, isn’t terribly persuasive. But he did remind us that Democratic presidential candidate Hillary Clinton wants to “increase the tax by reducing the threshold to $3.5 million and raising the rate to 45 percent,” while Republican nominee Donald Trump wants to eliminate it. At the very least, we should be thinking about what really should matter to the incoming administration.

There are many other tax issues that are far more important than the estate tax. The current corporate tax system is a structural mess, and it is the most important tax issue facing the U.S. today. For proof of its absurdity, look no further than the egregious carried interest loophole.

The estate tax makes for a fun debate, despite the noise surrounding it. Ultimately it is not much of a priority for anyone other than hardcore ideologues. Unless you are an ailing billionaire who lacks appropriate professional advisers, it is simply not a pressing issue.

A few details that seem to get overlooked in these discussions: All estates are subject to federal tax laws, but nearly all do not pay any federal taxes (state taxes vary widely). Indeed, of the 2.5 million annual deaths in the U.S., only 5,000 estates are subject to the tax. As I previously noted, calling it the “death tax” is utterly misleading, considering 99.8 percent of all estates are exempt from it. We could go the opposite direction and call it the “Paris Hilton tax cut,” as E.J. Dionne Jr. did some time ago, but I prefer to call it the “no lawyer or accountant/who is your financial adviser/why don’t you do basic planning/are you an idiot?” tax.

But I digress.

More interesting than all of this is the simple question of what the estate tax actually means. Consider:

• Tax receipts. Last year, estate tax revenues made up just 0.6 percentof total federal receipts. You can argue that, over decades, it adds up to trillions of dollars, or you could note what must be cut — NASA! PBS! — if the estate tax is repealed, but those are disingenuous arguments.
• Charities. Numerous studies from the Congressional Budget Office, the Center on Budget and Policy Priorities, the Treasury Department and others have shown that charitable foundations are the biggest beneficiaries of the estate tax. The CBO estimates that its repeal would reduce charitable giving by 16 to 28 percent. That’s potentially hundreds of billions of dollars in bequests and gifts that could be withheld.
• Class effects. As we have witnessed in historical British society (and on “Downton Abbey”), without an estate tax, a class of land owners living entirely off the rental income of inherited lands develops. This is not especially productive for society. Be it land or inherited wealth, creating a caste of unproductive but wealthy rentiers does not seem to be in keeping with the American ideals of a meritocracy.
• Small businesses and family farms. This group always gets trotted out in estate tax discussions. The $11 million-dollar exemption for married couples means that truly small family businesses and farms don’t pay an estate tax. The roughly 20 small business and farms nationwide that owed any estate tax in 2013 are the exceptions that prove the rule. And, among the few estates nationwide that owed estate taxes, the effective tax rate — that is, the share of an estate’s value paid in taxes — is about 16.6 percent, far lower than the 40 percent claimed by some.

Mankiw is a neo-Keynesian who once called supply-side economics a “fad.” Over the years, I have both agreed and disagreed with his views. His call for overturning the estate tax is one of those areas in which we disagree. The estate tax is a minor tax that does more good than harm.

Originally:  The Estate Tax Debate We Shouldn’t Be Having