Estate and inheritance taxes have been widely disputed throughout history, and their position in American tax code has fluctuated dramatically since their introduction. Initially, the estate tax levied a 10 percent tax on estates larger than $5 million. That said, at its peak in the 1940s, it levied a 77 percent tax on estates larger than $10 million, and then 70 percent on estates larger than $5 million from 1976 to 1982. In 2010, the tax was eliminated as a result of a plan put into place by President George W. Bush, but these changes were not permanent and the tax returned in 2011. Since it’s reinstatement, Congress has modified the tax to effectively impose a 40 percent tax only on estates in excess of $5 million, or $10 million for couples. Opinions on the tax lay firmly rooted on both sides of the debate, and the future of such a tax under the new Trump administration is left uncertain for the time being.
One common argument proposed by those opposing the tax is that it often strips families of small businesses and farms that have passed down through their lineage over the years. Conservatives largely use this angle to leverage the sad story of families losing their most cherished family assets. However, according to a report by US News, an average of only 20 small businesses and farms owe any federal estate tax each year. The report also explains that the idea of families being forced to liquidate their treasured businesses or farms to afford the tax is simply a well-documented myth- the estate tax contains special provisions such as the option to split payments for up to 15 years at a low interest rate, to make things more manageable. Additionally, a study by the Tax Policy Center explains that taxable estates owe, on average, 16.6 percent of their value in tax. This is clearly less than the 40 percent statutory rate that is often cited in arguments, and makes the tax seem much more affordable than typically thought.
Those in favor of estate tax repeal also often argue that the tax doesn’t raise enough money to be “worth the pain” it causes. However, a report by the Center on Budget and Policy Priorities explains that cutting the tax would increase the budget deficits over the next 10 years by nearly $320 billion. While this may not be a large portion of the total US budget, it is still substantial. Additionally, a repeal would largely benefit the nation’s wealthiest individuals and would have little to no effect on the majority of Americans. Only the wealthiest 5,400 estates would benefit from a repeal at all, and 73 percent of the benefit would fall to only 1,336 estates, each receiving $10 million in windfall taxes. The estate tax helps reduce the concentration of wealth from this small group of the wealthiest Americans, which has many chained effects. For example, in a society where the media rules public opinion, those who have large wealth can express their opinions to the masses while those without do not have this luxury.
On top of the counterarguments to repealing the tax, the existence of an estate tax creates benefits in positive externalities that are not often considered. For example, the tax incentivizes very wealthy individuals to donate to charities as a means of reducing their taxes. While some individuals with truly altruistic motives would still donate at a high level, total charitable contributions would likely drop significantly should the tax be repealed. That said, from an ethical standpoint, we must consider if it is morally “right” to punish individuals for becoming successful in life. A journal article from The Journal of Business explains that only 2 percent of income inequality can be attributed to inherited wealth. In other words, 98 percent of the income inequality in the United States is a result of individuals building their own successes rather than being handed them. As a Forbes article points out, the highest earners in America already pay an income tax rate approaching 50 percent, and their income is partially double taxed through the estate tax. The article argues that these wealthy individuals are already bearing the majority of tax burden of the American people, so it is unfair to further tax them as a result of their successes
Overall, I see both sides of the argument, although some claims are stronger than others. In analyzing the implications of an estate tax and the effects of repealing it, I believe there needs to be a middle ground. On one hand, a common understanding of investment shows that it takes money to make money, and the wealthy can increase their wealth easier through passive income streams and investments. For this reason, an estate tax is beneficial as it redistributes some of this passively earned wealth. It serves as a way to tax capital gains on investments which have never been taxed before. However, a statutory rate as high as 40 percent, even though the average effective tax is 16.6 percent, seems like a punishment for accumulating wealth. From an economic standpoint, there should be an estate tax to redistribute wealth and to ensure the government gets their cut of capital gains. However, the statutory rate should be adjusted closer to the effective average. Such an adjustment would be viewed as a win by those opposing the tax, and would effectively have a very minimal effect on actual tax revenues and income inequality.
People shouldn’t be penalized for being wealthy, but there should be a barrier preventing the wealthiest individuals gaining unfair permanent power over the less fortunate.