Inequality and the Estate Tax
By Carolyn Burstein
April 17, 2015
On April 16, the House voted (H.R. 1105) to repeal the estate tax. The vote (240-179) broke down largely on partisan lines. NETWORK actively opposed the bill.
An estate may consist of property, stocks or any combination of assets that a person owns. The Center for Effective Government (CEG), in an April 15 article, calls this move “alarming.”
After clarifying that the estate tax affects a miniscule proportion of Americans – only .2%, according to the research of the Center on Budget and Policy Priorities (CBPP) — the CEG makes very clear that repeal would exacerbate wealth inequality in this country. That is because it would result in approximately $269 billion (a figure derived from the Joint Committee on Taxation – JCT) in less funding over the next decade for programs in education, healthcare, child nutrition, etc. These are programs that help average — low-income and middle-income — people. This situation is especially stark in the context of the House budget, which already proposes to cut health reform, Medicaid, the Supplemental Nutrition Assistance Program (SNAP) and Pell Grants.
Only about two out of every 1,000 people who inherit an estate owe any taxes because the amount of the estate’s worth has increased from $650,000 in 2001 to $5.43 million per person ($10.86 million for a couple) in 2015 before the tax is triggered. As the CEG article notes, for “99.8% of Americans, death is a time when taxes are forgiven, not owed.”
The Tax Policy Center (TPC) estimates that only about 20 small business and farm estates owed any estate tax in 2013, and those owners paid only an average of 4.9% of their value in taxes (TCP Table T13-0020, quoted in a CBPP report entitled “Eliminating Estate tax on Inherited Wealth Would Increase Deficits and Inequality” issued on April 13, 2015).
Following up on this issue of the number of taxable estates, let’s compare a few random years. In 1977, 139,000 estates had to pay the estate tax (the estate tax has been assessed since 1916); in the year 2000, about 52,000 estates filed for the estate tax; whereas in 2013 only 4,687 filed. An incredible diminution over time!
If owners’ wills set up trust funds for heirs, and, given the fact that capital gains that normally accrue on the appreciation of assets are only realized when the asset is sold, then the normal capital gains tax would not apply if the estate tax is repealed. According to CBPP, “Unrealized capital gains account for a significant proportion of the assets held by estates, ranging from 32% for estates worth between $5 million and $10 million to about 55% for estates worth more than $100 million.”
An even more consequential reason that repeal of the estate tax is unsettling is that it would bestow a tax windfall averaging more than $3 million apiece on those who are often already extremely wealthy, according to CBPP calculations. That calculation is based on the fact that roughly 5,400 estates nationwide would face the estate tax in 2016. However, one must keep in mind that the 1,336 estates worth $20 million or more would receive a tax windfall averaging $10 million and the 318 estates worth $50 million or more would receive tax benefits averaging more than $20 million each. Since large inheritances play a substantial role in wealth concentration, especially at the top of the wealth pyramid, they are a prominent deterrent to economic mobility and belong in the category of “unearned income.”
While estate taxes constitute a tiny part of the federal budget — $269 billion between 2016 and 2025 – nevertheless, an April 15 online article by “Think Progress” notes that this amount would be sufficient to fund the Food and Drug Administration, the Centers for Disease Control and the Environmental Protection Agency combined. Or more to the point, as the April 15 online edition of the Huffington Post elaborates, $75 billion would let every low-to-moderate-income four-year-old attend preschool; or $209 billion would be enough to send 9 million striving Americans to a community college; or $89 billion would keep college affordable for millions more by reversing proposed budget cuts to Pell Grants; or ensure there’s enough food on the table for children, seniors, veterans and their families by restoring $125 billion in cuts to food stamps made in the House and Senate budgets.
Polls have long suggested that most people believe the wealthiest Americans don’t pay their fair share of taxes. Senator Debbie Stabenow (D-MI) said with a laugh on April 14, “I guess when it comes to helping the wealthiest people in the country, it’s never enough.”
House Ways and Means Committee Chairman Paul Ryan (R-WI) claimed that the estate tax is “absolutely devastating” for family farms, and he said that the repeal would remove “an additional layer of taxation” from assets that had already been taxed. An online Washington Post article on April 14 rebuts Ryan by indicating that only 120 small businesses and farms nationwide were subject to the estate tax in 2013. And because of all kinds of discounts and other breaks, such as low valuation rules and delayed tax payments, few heirs were hurt in any meaningful way. Furthermore, Congress has repeatedly cut the tax rate and increased exemptions. And there is no “double taxation.” Even the Americans for Tax Fairness conceded that 55% of the value of estates worth more than $100 million had never been taxed.
The Department of Agriculture estimates that with the exemptions, only .6% of American farms would have to pay an estate tax – more might file, but would owe no taxes. Even Senator John Thune (R-SD) and his staff could not identify any farms that were forced to be sold because of the estate tax. They indicated that in a few cases some new owners had to sell some acreage to pay the tax, but even in those cases this occurred because land prices had soared in certain areas.
We Must Not Increase Inequality
At a time when income inequality is one of our most vexing problems, the wealthiest .2% of Americans who have already become the permanent elite of this country, needs no help from Congress to ensure their status. One can partially rest in the knowledge that the estate tax proposal is unlikely to make it through the Senate or past a presidential veto. President Obama and many other senior Democrats want to expand the estate tax especially by targeting more estates with a higher top rate. On April 15, the online edition of The Hill pointed out that White House officials have reemphasized the president’s proposals to give tax breaks for child care and education and to two-earner families. They are right to conclude that such policies, if passed, would help far more people than the GOP’s estate tax repeal.
Indeed, this latter point is significant. The effort to repeal the estate tax does nothing to promote family stability, respond to the needs of people at the margins, or address the human needs of people. At a time when the gap between the wealthy and those barely able to afford the necessities of life is yawning widely, no one should support the repeal of the estate tax.
NETWORK believes that the accumulation of wealth (or profits) should never take precedence over ensuring adequate resources for all people to lead a dignified life, and that includes meeting the basic needs of the whole person. Giving a very few people who are heirs to a huge estate a tax windfall does not build a relational society based on achieving the common good for all. We are called to act beyond selfishness, to approve an outreach to community that supports the eradication of all injustice no matter what form that takes. And what some call the “repealing the death tax” falls into the category of classism—a major injustice today.