Q: What arguments can be made in favor of the estate tax?

A: Here are a few reasons why we think the estate tax is worth keeping.

The American way: The estate tax does more than raise revenue. It also helps reduce concentrations of power and promote equality of economic opportunity-- to "break up the swollen fortunes of the rich," as Congress put it back in 1916 when the estate tax was first adopted.

This is a goal that ought to be shared across the political spectrum. As ultra-conservative James Glassman put it a decade ago in Slate, "Free-market types . . . generally believe government should promote equality of opportunity . . . . We'll never have precisely equal opportunity . . . , but why not use the tax code to discourage a gigantic head start?"

Although it's far from perfect, the estate tax does reduce concentrated wealth to a degree--if it didn't, then nobody would be lobbying to repeal it. Indeed, for the very largest estates (worth more than $20 million), only about a third of net assets ends up in the hands of heirs, as the table at right shows. The rest goes to charity and to federal and state estate taxes.

Simple fairness: A tax that gets all its revenues from the wealthiest 1.2%—and over 60 percent of its revenues from the wealthiest 0.1 percent—is obviously very progressive. And from the point of view of most taxpayers, that's a very good thing. Simply put, progressivity allows most people to pay less because those with the highest incomes pay more.

A fair tax system shouldn't push poor people even deeper into poverty and it shouldn't ask middle-income families to forgo the necessities and pleasures of life so that rich people can enjoy even more luxurious lifestyles. In short, progressive taxes can mitigate the inequalities that capitalism demands without stifling incentives. In this regard, the estate tax, with "disincentives" limited mainly to ex-people, is a star.

It's worth noting that the bulk of the largest wealth accumulations have never been touched by the income tax--they're mainly unrealized capital gains. Without the estate tax, those gains would remain untaxed forever--because the income tax forgives those deferred taxes at death.

Discourage sloth: "The parent who leaves his son enormous wealth," wrote steel magnate Andrew Carnegie a century ago, "generally deadens the talents and energies of the son, and leads him to lead a less useful and less worthy life than he otherwise would."

You'd think that Republicans, if anyone, would sympathize with Carnegie's point. After all, if giving a single mother $10,000 a year in welfare stifles her incentive to work, just think how much worse it must be for someone who gets a windfall of 100 or 1,000 times that much.

Encourage charitable giving: In 2004, tax-filing estates gave almost four-fifths as much to charity as they paid in federal estate taxes. For estates worth more than $20 million, charities got more than federal tax take, as shown in the chart above.

Although only 520 estates reported gross assets of more than $20 million in 2004 and only 272 of them left any money to charity, these estates were responsible for about 40% of all reported charitable bequests.

Absent the estate tax, bequests to charity would probably be lot lower. A 2003 report from the Brookings Institution found that estate tax repeal would "reduce annual charitable giving in life and death by about $10 billion, the equivalent of eliminating all current grantmaking by the country's 110 largest foundations."

Farmers & small businesses: The family farmer is the poster child of the anti-estate-tax movement, but the truth is that few farmers leaves a taxable estate. In 2001, the American Farm Bureau, which supports estate tax repeal, admitted to the New York Times that it could not provide any example of a family farm that had to be sold to pay estate taxes.

That's partly because of a series of special estate tax breaks have been offered to family farmers. In addition to the basic exemption that applies to all estates (which was set at $1.5 million in 2004), family farms get an extra exemption of $300,000 and the taxable value of the farm estate is based on its “current use” as farmland, which is typically much lower than its value for sale or development purposes. (The "current use" reduction is capped at $900,000 in 2006 and adjusted annually for inflation.) In addition, estate taxes on family farms can be paid over a period of 14 years.

 

Show us the money: Over the next several years, the estate tax is expected to result in about $80 billion in revenue annually. Repeal of the estate tax, when fully in effect, is projected by the Center on Budget and Policy Priorities to cost $808 over a decade. Since all tax cuts are currently being deficit-financed, the added interest on the national debt would be an additional $222 billion over a decade, putting the total cost at over a trillion dollars over ten years. To put that in perspective, the Iraq war is estimated to cost us $378 between March 2003 and March of 2007, about $95 billion a year. In other words, repealing the estate tax would cost about as much as having a second Iraq war that never ends.

 

 

 

Background on the Estate Tax:
The venerable estate tax is the federal government's only tax on accumulated wealth. From its inception in 1916, it has applied only to the very largest estates. Above an exemption level of $2 million in 2006 (effectively $4 million for couples), the estate tax rate is from 39% to 42% (after credits for state inheritance taxes). See the FAQ on how estates taxes are calculated for more information. The portion of a decedent's estate passing to a spouse is exempt from tax. In 2004 (when the exemption was $1.5 million), only about 1.2% of all decedents paid any estate tax. Of those estates that did pay tax, the effective rate (the rate of tax after accounting for exemptions and credits) is often lower than the rate of tax many people pay on their wages. The effective rate rose from 5.5% for those estates worth between $1 million and $2.5 million, to 18.3% for those estates worth between $10 and $20 million. The effective rate for estates worth $20 million or more was only 14.0%, largely because these estates gave a large share of their assets to charity.



 

Last Updated 10/4/06


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