Inheritances: Debating the ‘death tax’
An important anniversary in the history of American taxation just went by “mostly unnoticed,” said Philipp Alvares de Souza Soares in The Washington Post. Sept. 8 marked 100 years since the passage of the federal estate tax on inherited wealth, better known by its critics as the “death tax.” Then, as now, the estate tax affected only a tiny number of Americans, but that hasn’t stopped it from becoming a political football in the decades since, including in this election. Today, the federal government imposes a 40 percent tax on inherited wealth in excess of $5.45 million left by a single parent, or $10.9 million from a married couple. Hillary Clinton wants to expand the tax in a bid to shrink the country’s growing wealth gap, lowering the single-parent exemption to $3.5 million. Donald Trump, on the other hand, has called for the death tax to be abolished, but his latest tax plan would tax unrealized capital gains over $10 million at death.
Taxing inheritances is fundamentally unfair, said N. Gregory Mankiw in The New York Times. The allure of making the wealthy pay their “fair share” is understandable, but it doesn’t work that way in practice. Instead, the estate tax violates the basic idea “that similar people should face similar tax burdens.” Consider this: Two different couples amass a nest egg of $20 million. The first couple live modestly, hoping to share their success with their children and grandchildren. The second couple blow through their fortune, enjoying the finer things in life. “How should the tax burdens of the two couples compare?” If the federal government taxed consumption, the profligate pair would pay more for their lavish lifestyle. But under our current system, with an income tax coupled with an estate tax, the frugal couple are punished. “To me, this does not seem right.”
Actually, “the estate tax is a fundamentally American notion,” said Chuck Collins in USNews.com. The progressives of the early 20th century rightly saw it as a democratic check against dynastic wealth and de facto aristocracy. With the Forbes 400 list of the richest Americans today holding as much wealth together as 62 percent of U.S. households, we need the estate tax as much as ever. “The estate tax makes for a fun debate,” said Barry Ritholtz in Bloomberg.com. But ultimately, out of the 2.5 million annual deaths in the U.S., only 5,000 estates are subject to the tax. Not only that, but killing the tax might have unintended effects. The Congressional Budget Office estimates that a repeal would reduce charitable giving by 16 to 28 percent, because fewer members of the super-rich would try to shield their fortunes through philanthropy. “Unless you are an ailing billionaire who lacks appropriate professional advisers, [the estate tax] is simply not a pressing issue.”