Image from (Public Domain).

As President Trump and Congressional Republicans are poised to to place into law an historical revamp to the United States tax code, changes to the estate tax may be receiving less coverage than other items such as a big decline in the corporate tax rate, the loss of some individual tax credits, and changes in the standard deduction and child tax credits because so few are directly affected by it. It is also not consequential to federal revenues, providing only about $20 billion, or less than 1% of federal revenues.

Although a similar tax had been in place periodically before, the modern estate tax in the United States came into being in 1916. Only those families with extensive wealth need have been concerned with it – the $5 million exemption given at the time would be $113 million today, anything over $5 million was taxed at 10%.

During the Great Depression, both the exemption and the top rate governing the estate tax were considerably raised. In 1934 they grew to 60% and $50 million ($934 million in 2017). Franklin Roosevelt said at the time, “The transmission from generation to generation of vast fortunes by will, inheritance, or gift is not consistent with the ideals and sentiments of the American people.” Decades before, Teddy Roosevelt had also suggested that an estate tax should be levied for similar reasons. From the beginning then, the estate tax in the United States was levied to prevent the concentration of wealth rather than to raise federal revenue. For the most part, the estate tax has raised between 1% and 2% of federal tax revenue. The tax reached its zenith between 1954 and 1977 when estates were taxed 77% over $10 million.

Frank Luntz, political consultant extraordinaire, gave life to limiting and repealing the estate tax shortly after working for then Speaker of the House Newt Gingrich on his 1992 “Contract with America,” by re-labelling it the “death tax.” Yet, even before that, the estate tax was never among the most popular taxes in the country. Under current law, estates are taxed at 40% above a nearly $5.5 million exemption.

Milton Friedman was once asked by a student whether he would support a 100% inheritance tax since it would not influence present choices. Correcting the student, Friedman said that doing so would destroy incentives not to fritter away savings on things of little value as well as the continuity of a familial society.

Arguments against the estate tax are similar to Friedman’s, namely that it discourages thrift and entrepreneurship as well as being unfair since income that builds an estate has already been taxed. The machinations that families go through in order to avoid the tax can be quite extensive as well, prompting one group to estimate that repealing the estate tax would add nearly 1% to GDP, a figure that seems rather high, but the point is still valid.

Despite that, there are many extremely good reasons for maintaining an estate tax, albeit with a rather high exemption. Warren Buffett recently called the repeal of the estate tax “a terrible mistake” because of the ability for dynastic wealth to become the center of the economy. It may be an American value for hardworking and thrift-oriented parents to leave an inheritance for their children, but it is equally un-American to structure a system in which success has more to do with luck than those same principles of industriousness and talent.

When Buffett speaks of the estate tax, many criticize him because he avoids the tax by giving the bulk of his fortune to charity. The argument is quite spurious and confusing. A well-designed estate tax should encourage charitable giving. Wealthy families can plan their estates to support causes near to them and throughout the world that they feel deserve funding. Buffett has been one of the architects of “The Giving Pledge,” in which 158 billionaires have pledged to leave a majority of their wealth to charities.

Trends toward eliminating estate taxes have taken hold worldwide as well. Several OECD nations – including Canada, Australia, Israel, and Sweden – have no estate taxes. It is a dangerous trend given the multitude of forces working to concentrate pre-tax wealth even before progressive measures like the estate tax are taken into account.

While it looks like the estate tax is dead for the time being in the United States, the most sensible policy in the future is a tax with a high exemption accompanied by high rates.

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