In examining the GOP tax plan in this space, we noted that the provision eliminating the estate tax looked a lot like a bargaining chip “to be negotiated away to placate deficit hawks.”
Well that didn’t take long.
“I don’t think we have to totally repeal it,” Senator Mike Rounds (R-S.D.) said to the Wall Street Journal on Oct. 5, “because I think the folks on the upper end of it are all avoiding it right now legally anyway.” The estate tax is “not a priority for me as we seek to craft this tax bill,” agreed Senator Susan Collins (R-Maine).
We predicted it, but we weren’t hoping for it. The estate tax is popularly and rightly termed the “death tax.” It is an indefensible levy on successful people for the simple reason that they’ve died.
The tax doesn’t get much criticism because it doesn’t affect many people—only a few thousand estates are subject to federal taxation each year—and all are on the wealthier end of the spectrum. Under current law, the first $5.49 million of a person’s estate is exempt from estate taxes, but after that it is taxed at a rate of up to 40 percent. The current exemption is high enough to exclude most estates, but owners of small companies and family farms get ensnared by it.
The estate tax doesn’t generate a lot of revenue—just 0.7 percent of the $3.3 trillion in federal revenue in 2016. Mainly what it generates is satisfaction on the part of those who feel the government has a duty to punish the rich. And it is, almost by definition, a punishment: The money levied by the estate tax has already been taxed at least once before—sometimes more but this isn’t the time to take up the issue of the capital gains tax. The government is taking already-taxed money for the simple reason that it can.
Double taxation is morally reprehensible, but it’s also practically harmful. People spend their careers working and paying taxes. If they’re sufficiently wise and frugal to take their after-tax earnings and save for retirement, an unexpectedly early death can wipe out those savings. Tax policy necessarily creates incentives, and the estate tax encourages would-be payers to spend.
Taxes on estates have been around from the very beginning of our republic. They’ve been repealed and reinstated at various times. Recall that the estate tax lapsed for a year in 2010, creating the most perverse of Washington tax incentives. Heirs were tempted to root for the deaths of any wealthy forebear before the tax was reinstated on January 1, 2011.
Eighteen states and the District of Columbia impose their own inheritance taxes. Most are in the Northeast, which explains the net migration of retirees out of the region almost as much as the cold winters. Consider Alice B. Lloyd’s account of Connecticut’s economic woes in our October 16 issue. The state’s levy on death ranges from 7.2 to 12 percent on estates $2 million to $10 million, and the state can claim a portion of your estate if you’ve lived in Connecticut within five years. “I cannot afford to die in this state,” noted Aetna CEO Mark Bertolini. It will come as no surprise that the insurance giant is moving its headquarters from Connecticut.