The death tax

Every 2-4 years, Republican lawmakers and Conservative Presidential candidates talk incessantly about the need for tax reform.  The tax reform that they are referring to also includes the call for a repeal of the estate tax, the so-called death tax. The way that the tax is talked about, you would assume that everyone has to pay the tax.  That once you or a loved one dies, there is a considerable amount of tax on the property that is left and then it is taxed again once inherited.

As you probably know, either due to my writing style or the fact that you’ve rad up on the issue, this view is incorrect. The estate tax is only levied on those above a certain threshold for their estate’s value.  The value is $5.45 million per person or $10.9 million per married couple.  Because it’s such a high threshold, there is not that many people affected by the tax.  According to the Joint Committee on Taxation, there were 2.6 million deaths in the United States in 2013 and there were 4,700 estate tax returns filed.  So the percentage of those affected were 0.2%.  Or 2 out of every 1,000 deaths.  This is partially due to the fact that the exemption is so high, now.  At its peak, the Joint Committee on Taxation noted that 6% of all deaths were affected by the estate tax.

The Joint Committee on Taxation gives a brief history on estate or inheritiance taxes which I hope to paraphrase:

Inheritance or estate taxes have been around primarily to finance debts from war or the threat of war.  From 1797 to 1802, the stamp tax was enacted on the inventories of dead people.  After the repeal of the stamp tax, there was not a tax on inheritance until the Civil War.  From 1862 to 1870, there was an inheritance tax to help pay for the Civil War.  There was another estate tax imposed in 1898 to finance the Spanish American War until 1902 when it was repealed. There was not an estate tax again until World War I in 1916.  It remained in effect.  The top rate was increased during the Great Depression when revenues for the government were most needed. The estate tax remained in effect until 2001 when there was legislation passed to reduce the estate tax and eventually eliminate. In 2012, there was another law enacted to permanently place the estate tax in with an increase indexed for inflation.  If you want to read more about the history of the estate tax, you can read the full report from the Joint Committee on Taxation.  It’s fairly interesting.

“Further, the House considered, HR 1105, the Death Tax Repeal Act of 2015.  As you may know, I have long supported the full and permanent repeal of the estate tax because I do not believe that death should be a taxable event, and because it acts as a direct, job-killing tax on family-owned farms and small businesses, which have historically created countless good jobs in Wisconsin and across the country over the last decade.  For these reasons, I was pleased to support this legislation, which passed in a bipartisan fashion by a vote of 240-179.  The bill was received in the Senate on April 20, 2015, and I look forward to Senate action on this important piece of legislation.” – Paul Ryan 

The most consistent attack on the estate tax is that it unfairly attacks family farms and small businesses.  The non-partisan (despite what Mitt Romney said in 2012) Tax Policy Center estimates that only 30 small farms or businesses will pay the estate tax for 2015.  Their definition was one that has more than half of its value from a farm or business and is valued at less than $5 million.  Their study in 2013 found that on average, these small businesses or farms would owe less than 5% of their total value in the estate tax.   The Congressional Budget Office (CBO) notes in their report that “certain types of businesses can spread their tax payments over 15 years in some circumstances. For farmers, a special method of calculating the value of a family farm can lower the amount of estate tax owed.”  They also note that the vast majority of estates, including farms and small businesses can afford the estate tax bill with liquid assets.

The Center on Budget Policy and Priorities (CBPP) released a policy paper on the potential effect of repealing the estate tax.  Repealing the estate tax would hurt problems that both liberals and conservatives believe are very important.  First, it would increase the deficit of the United States.  Eliminating the estate tax would cost nearly $270 billion in additional revenues from from 2016 to 2025 according to the Joint Committee on Taxation.  Once you count the interest, this will add nearly $320 billion.  This may not seem like very much when you consider the totality of the US budget but it’s significantly more than what the US Government will spend on the Environmental Protection Agency, the Centers for Disease Control, and the Food and Drug Administration (and is more than if you combine the three according to the CBPP)  This also hurts other potential revenue.  The estate tax was mainly created to tax money that otherwise would not have been taxed.  32% of the value of estates worth $5 million to $10 million to about 55% of the value of estates of those worth more than $100 million are unrealized capital gains. Capital gains are taxed only when they are realized so if the gains are held onto until death, they are never taxed.  The repeal of the estate tax would make income inequality worse.  Inheritance, which is certainly concentrated at the top “1%”, accounts for about 40% of all household wealth.  Reducing the amount of money in inheritance through the estate tax actually encourages the wealthiest offspring to work instead of relying on their inheritance contributing more to the economy.

 

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