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GOP Tax Plan VI: The Estate Tax

 “Even among high-income Americans, the plan seems designed to reward those who don’t work for a living — or more precisely, the less you actually do to earn your income, the bigger your tax break. Business owners would owe less in taxes than high-earning professionals; passive investors, who just sit there and collect dividends, would owe less than those who at least run their businesses. And wealthy heirs, who did nothing to earn their wealth except choose the right parents, would pay no taxes at all.”

This is Paul Krugman’s take on the GOP tax plan. In response I’ve heard a few spirited defenses of the estate tax, including the “double taxation” argument. I don’t buy it.

The general rule of money is that it is taxed when it moves. When you are paid a salary, some of that is taxed as income tax. When you use it to buy something, there is sales tax. People accept that both these taxes are valid, and you don’t hear a lot of argument that sales tax is “double taxation” because you already paid income tax on the funds. Likewise, when heirs get a windfall, the money is moving – from the dead person to the heirs. The fact that it was taxed as earnings when originally acquired by the dead person does not invalidate a tax on the transfer, any more than income tax invalidates sales tax. The application of that logic is purely “motivated reasoning”.

There is a second logical fallacy around the estate tax, namely that it is this incredibly heavy burden, but that it effects almost nobody. The first statement is used to argue that it should be eliminated because it is so much, the second to argue that it should be eliminated because it is so little. It is hard to argue both at once.

Some claim that is all fine, but the percentage the of the tax is colossal, as well as being meaningless to the US treasury. It’s an equality tax more than a means of generating revenue. To this I would agree for the most part, though I’ll quibble about degree. The estate tax is indeed an equality tax. And it is widely evaded, by means both legal and illegal. As such, it has only a minimal impact on the treasury, though a bit under 1% of total revenue is still a lot of money. This could be fixed a number of ways, though all we ever hear about is how it should be totally eliminated. You could, for example, make it a graduated tax that mirrors the tax on ordinary income. That is, treat inheritance as ordinary income to the receiver, rather than as a special tax to the relinquishing estate. And, of course, you’d need to fix the loopholes that are family foundations, living trusts, etc. Along with cracking down on offshore money laundering. That would make things fairer, and bring in a lot more money to the treasury. But you don’t hear many proposals along those lines.
There is a whole industry around how to avoid taxes on intergenerational wealth transfers. And most of it is totally legal. Which is why you keep hearing that the estate tax is one that “almost nobody” pays, even and especially among those whose estates would be worth over $5 million. Now that can be an argument to eliminate the estate tax (“stop making us work so hard to avoid this tax by eliminating it altogether; it’s not fair to those who can’t figure out the avoidance”). Or you could use that as an argument to close the loopholes and make the tax apply to all estates regardless (though ideally on a progressive scale). On proposal I heard was 10% on $10M-$20M, 20% on $20M-$50M, 30% on $50M-$100M and 40% on $100M+, and close all the loopholes. I would consider that a vast improvement over the current system.

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