Inequality and the Estate Tax: What You Need to Know

Beginning this evening, the House is expected to vote to repeal the estate tax – one of our nation’s key checks on tremendous accumulations of wealth by a handful of the richest Americans.

This is alarming, given the revenue that would be sacrificed and the historical importance of the estate tax. Thankfully, the president appears poised to veto the repeal bill if it also passes the Senate and reaches his desk.

Surveys suggest many Americans are unsure who pays the estate tax and how the estate tax works. Let’s clear up some of this confusion.

First of all, only two in 1,000 estates, or 0.2 percent, are subject to the estate tax.

The chart below, from the Center on Budget and Policy Priorities, puts this number into perspective:

Those who want to eliminate the estate tax have confused the public by incorrectly referring to the tax as the “death tax.” They say that we shouldn’t put a tax on death, but that isn’t what the estate tax does.

The vast majority of inheritors actually receive a tax break

All estates that are worth less than $10.8 million per married couple or $5.4 million for a single person – 99.8 percent of all estates – are exempt. This means the vast majority of inheritors actually receive a tax break when a loved one passes. 

How? Let’s take property ownership as an example. Real estate, like many other valuables and investments, tends to increase in value over time. For instance, let’s say the house your grandmother bought in 1975 for $35,000 is now worth $200,000. The current value of the home has increased substantially. Your grandmother could sell her home today for around $200,000. Because she would make a profit on the sale, she would owe capital gains taxes on that profit.

However, if she doesn’t sell and lives out the rest of her days in the house, she’ll avoid ever having to pay taxes on her profitable real estate investment. When she leaves the house to her loved ones after her passing, they will also be exempt from this tax, saving them thousands of dollars. For 99.8 percent of Americans, death is a time when taxes are forgiven, not owed.

The estate tax is imposed on only the wealthiest 0.2 percent of Americans.

The first $5.43 million, or $10.8 million for a married couple, of the property, stocks, and other assets that a person owns when they die is exempt from the estate tax. Amounts over this threshold are taxed at 40 percent.  After accounting for tax deductions and other exemptions, the effective tax rate on estates is 16.6 percent.

The estate tax also applies to many fewer estates than it has in the past. Prior to 2003, about two percent of estates were subject to the estate tax — ten times the current number. Under President George W. Bush, the number of estates subject to the tax was reduced, and the maximum tax rate was cut from 60 to 45 percent.

In turn, the number of estates affected by the estate tax has fallen rapidly in the last decade.

Cuts to the estate tax have left less revenue for public goods and services, even as the concentration of wealth among the superrich has increased.

Even as the share of wealth held by the top 1 percent, and especially the top 0.1 percent, has increased, the estate tax has collected less revenue for public investments. This trend in recent years is a consequence of the 2001 Bush tax cuts, which gradually phased out the estate tax over ten years. Before the estate tax was entirely eliminated, Congress restored it in 2010. Historically, the estate tax has made up one to two percent of federal revenues, although this percentage has jumped dramatically in times of war.

The estate tax currently makes up less than one percent of all federal revenue, but this is still a significant amount. Repealing the estate tax would eliminate $246 billion in funding for programs like education, child nutrition, and protecting the environment over the course of the next decade.

According to some indicators, the high levels of wealth concentration among the 1 percent that we see today are approaching levels not seen since the 1920s. At that time, business titans had accumulated such unimaginable amounts of personal wealth that there were real fears it would create a permanent American plutocracy. In the face of a threat to our nation’s democracy, our country’s most progressive tax, the estate tax, was established.

Today, we face a concentration of wealth similar to that of a century ago. If we were to stop taxing the transfer of massive wealth, we increase inequality now and in future generations. If Congress’ response is to eliminate the nation’s most progressive tax, the wealth inequality we see today will soon look mild in comparison to what’s to come.


For Further Reading:

Budget Cuts at the IRS Leave Phones Ringing and Hurt the Middle ClassThe Fine Print, 4/10/2015

Progressives Present Alternative Budget: A Raise for AmericaThe Fine Print, 3/19/2015

Walmart Workers to Earn $10 an Hour; Walmart Heirs “Earn” $445,776 an HourThe Fine Print, 3/5/2015

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good points