Is a “Death Tax” worse than an “Estate Tax”?

Most Americans think that the estate tax (popularly known as the ‘death tax’) should be reduced or eliminated.  Wealthy elites funded a campaign starting in the mid 1990s which successfully rebranded this tax on large estates into a tax on death.  Jordan Weissmann says that the American public did not turn against it because of adopting the term ‘death tax’, but the success of the term does signify the success of the campaign to get Americans to think of the estate tax as being an unfair tax on ordinary people when they die.  Google’s Ngram Viewer shows how the term ‘death tax’ was half as common as the term ‘estate tax’ in written English in 1990.  As of the most recent data the term ‘death tax’ has skyrocketed to become almost three times more common than the more accurate term.

death estate tax

Weissman says that most Americans want to raise taxes on the wealthy, but they incorrectly think that the estate tax really is a death tax that hurts ordinary Americans when they die.  When Americans learn that the estate tax really is a tax on extreme wealth, a majority supports the tax.  That misinformation is the real reason why American support for the estate tax has waned. The campaign to rebrand it as a death tax has spread the myth that it mainly hurts small businesses and farmers.

The Center For Effective Government (CEG) estimates that, “of the 2,662,000 Americans who died in 2013, just 3,700 of their estates paid any estate tax – one out of every 700 estates.”  Of the estates that paid the tax, only 120 were family businesses or farms.  Those were pretty rich farmers because there is no tax on the first $5.4 million ($10.8 million for couples) of estate value plus further exemptions that often save billions more through loopholes.

The CEG estimates that if the government just collected the full value of the current estate tax on the 25 richest Americans, it would bring in $334 Billion in revenue.  The CEG says that would be enough to give a $10,000 inheritance to every child born in America for the next nine years!  That could pay for a lot of college education.  Or it could pay for $10,000 in payroll tax cuts for them.  Here is the CEG’s list of how much the top 25 richest Americans would pay:

Billionaire Wealth Source Wealth
(in $ Billions)
Estate Tax @ 40%
(In $ Billions)
Bill Gates Microsoft 81.0 32.4
Warren Buffett Berkshire Hathaway 67.0 26.8
Larry Ellison Oracle 50.0 20.0
Charles Koch Inherited — Koch Industries 42.0 16.8
David Koch Inherited — Koch Industries 42.0 16.8
Christy Walton Inherited — Walmart 38.0 15.2
Jim Walton Inherited — Walmart 36.0 14.4
Michael Bloomberg Bloomberg plc 35.0 14.0
Alice Walton Inherited — Walmart 34.9 14.0
S Robson Walton Inherited — Walmart 34.8 13.9
Mark Zuckerberg Facebook 34.0 13.6
Sheldon Adelson Las Vegas Sands 32.0 12.8
Larry Page Google 31.5 12.6
Sergey Brin Google 31.0 12.4
Jeff Bezos 30.5 12.2
Carl Icahn Icahn Enterprises (private equity) 26.0 10.4
George Soros Soros Asset Management 24.0 9.6
Steve Ballmer Microsoft 22.5 9.0
Forrest Mars Jr Inherited – Mars Candy 22.0 8.8
Jacqueline Mars Inherited – Mars Candy 22.0 8.8
John Mars Inherited – Mars Candy 22.0 8.8
Len Blavanik Access Industries (private equity) 21.5 8.6
Phil Knight NIKE 19.9 8.0
Michael Dell Dell Computer 17.7 7.1
Laurene Powell Jobs Inherited — Apple 16.6 6.6
Total 333.6

Many of these people are in favor of the estate tax.  The CEG notes that ” Bill Gates, Warren Buffett, George Soros, and Carl Icahn have all campaigned publicly to keep a strong estate tax.”   None of these billionaires have personally felt the effect of the estate tax because none of them inherited billions of dollars.  In contrast all of the people on the list (underlined above) who inherited billions of dollars are opposed to the estate tax.  The one seeming exception that proves the rule is Steve Job’s widow at the bottom of the list.  She inherited most of her billions, but she did not pay any tax because spouses are exempt.  I don’t know if she supports the estate tax, but given her philanthropic priorities include efforts to reduce inequality, I would guess that she would support it.

Inherited-wealth families like the billionaires above have funded a longstanding campaign to increase inheritance for their elite children by repealing the estate tax. Ryan Ellis is part of the campaign and he claims that it is futile to try to tax the wealthiest Americans because:

The uber-rich can afford these “teams of lawyers and accountants” to “develop and exploit loopholes” for their clients. First and second generation business owners and family farmers cannot.  As a result, Paris Hilton will be death tax free her whole life (and beyond), but startup business owners will either have to pay the death tax or funnel scarce capital into their own little army of tax nerds and lawyers.

The solution is simple.  Eliminate loopholes for the uber-rich so that Paris Hilton has to pay.  “Startup business owners” don’t have a problem because the tax only affects multi-million-dollar estates and anyone with a multi-million-dollar estate can afford lawyers and accountants to help them exploit loopholes. Furthermore, “startup business owners” rarely have estates worth more than $10.8 million (the current exemption for couples) and the few multi-million-dollar children who inherit expensive startups without exploiting the loopholes can always raise funds for the tax by selling shares to outside investors or by getting a loan.  These are the old-fashioned funding mechanisms that most startups have to use.  As long as there are tax loopholes then all the multimillionaires affected by the tax can afford to exploit the loopholes, but some multimillionaires dutifully pay the tax and it isn’t fair that others can scheme up ways to evade it.

Ellis also says we should eliminate the estate tax because it “collects almost no tax revenue” and is “a declining source of federal revenue”. True, the estate tax generated more than twice the revenues before his campaign succeeded to weaken it.  The top estate tax rate fell from 77% in 1976 down to zero percent in 2010. It is back up to 40% now which is only about half its peak rate, but both this nominal rate and the effective rate is much lower today than it was during most of the golden age of America’s middle class wage growth.  Ellis argues that the past success of his campaign to weaken the estate tax is a reason to weaken it further.  That is a good example of how weak his campaign’s arguments are.

Ellis dismisses the debate over the estate tax as “class warfare”, but politics has always been partly about class warfare. Ellis provides facts showing that “the uber-rich” have been winning the war over the estate tax, and then he concludes that ordinary Americans should just surrender and let inequality and inheritance continue to skyrocket as they have since the 1970s.  The sad thing is that most Americans agree with him because his campaign’s arguments have succeeded in fooling Americans into thinking that the estate tax increases inequality by hurting small businesses while the Paris Hiltons evade the tax.  Estate tax evasion is a problem, but Ellis wants to increase the problem and the real solution is to reduce it.

Posted in Public Finance

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