WASHINGTON, August 24, 2016 — The Hillary Clinton and Donald Trump economic plans cover vast swaths of economic territory, from personal income taxes to trade policy to corporate inversions. The differences in philosophy of the two candidates can best be seen in some of the details of their policies.
The federal estate tax (“death tax”) is one such detail. Though it affects few taxpayers, it has been an important talking point for the two campaigns.
The federal estate tax is levied on estates exceeding the exemption level, which is currently $5.45 million per person or $10.9 million per couple. The current maximum rate is 40 percent, though in 2013, the last year for which there are available data, the average estate tax was 16.6 percent.
If a couple left behind and estate worth $10 million, the heirs would owe no federal estate tax. If an individual left behind an estate of $6 million, the heirs would owe tax on $550,000 at a rate of 7.7 percent. The effective rate on the
Few American estates owe any estate tax at all. Because the exemption level is so high, only one in 500 to 700 estates pays any tax. According to the Center for Budget and Policy Priorities, $1.2 trillion was inherited in 2012; the total tax was $8.5 billion, less than 1 percent of the value of the estates.
Because the estate tax has such large exemptions, it is considered one of the most progressive taxes in the country. That is, it only hits the very wealthiest Americans. It has been crafted to avoid hurting small businesses and family farms, the traditional concern of opponents to the tax. In 2013, fewer than 20 small businesses and family farms were subject to the federal estate tax.
Donald Trump wants to eliminate the estate tax completely. Hillary Clinton proposes raising the top rate to 45 percent and cutting the per-person exemption to $3.5 million, or $7 million per couple. Her proposal does not adjust the exemption for inflation. President Obama has proposed similar changes, which would return the tax to its 2009 levels.
The economic impact of each plan relative to the other is minimal: Under the Clinton plan, the tax would raise under $300 billion in the next ten years, a drop in the ocean of federal spending. But the tax is important as an ideological marker.
Proponents of raising the tax argue that it helps break up accumulations of wealth. It is a tax on millionaires and billionaires, not on small business owners and farmers, and not a tax on the middle or even much of the upper class. The estate tax can inhibit the creation of aristocratic dynasties and retard the growing wealth inequality in America.
Proponents view the tax as a fall-back for the capital gains tax. If the value of your assets rose and you sold them, you’d owe capital gains tax. If instead you left them to your heirs, there would be no capital gains tax charged, and no tax at all on the increased value without the estate tax.
To many liberals, the estate tax is a moral imperative. It ensures that the rich will pay their fair share. To them, the tax is progressive in every meaning of the word.
Opponents of the tax likewise see this in moral terms. It is grossly unfair to tax wealth twice: once when you earn it, and again when you leave it to your heirs. The formation of hereditary wealth is not a matter of taking anything from the non-wealthy, so to seize it is an impulse born of envy, not a desire for fairness.
Opponents make an economic argument as well: To tax estates will inhibit the behavior that creates them. People often amass estates out of the human urge to provide for their children and grandchildren. That should be encouraged, no discouraged.
The morality of either position depends on the values of the person hearing the arguments. There is no objectively superior position here. The economist would ask instead, does the tax do what it is designed to do?
If it is designed to raise revenue, it does a poor job of it. The rates are far too low, the exemptions far too large. Only an estate tax that bites into the wealth of the middle class is likely to have a strong impact on budget deficits, and the political support for that kind of tax is non-existent. Not even what passes for wild-eyed socialists in the U.S. would try to make the tax hit non-millionaires.
If it is designed to break up large estates, the tax is also a failure. The average effective rate on people who do have to pay it is about 17 percent, not the statutory limit of 40 percent. Billionaires like the Walton family are able to do estate planning to shield their estates from taxes, and Clinton is not likely to change that. It’s far easier to raise statutory tax rates than to raise effective rates.
Economic studies have not determined whether the estate tax promotes or inhibits economic activity. People create wealth for reasons other than leaving it to their heirs. Silicon Valley billionaires seem motivated as much by drive, ego, the desire to build foundations that will change the world, and the quest for immortality as they do by the urge to make their children wealthy. Heavy estate taxes are unlikely to change that.
But who knows. The estate tax is a sharp ideological line, a shibboleth to distinguish liberals from conservatives. What it is not is an effective tool to raise revenue, perform social engineering, or to stimulate the economy. It is a small window into the preferences of the candidates and their beliefs about what makes a good society.