Benjamin Franklin may have said that the only certainties in life were death and taxes, but Congress now has a historic opportunity to ensure that death is no longer a taxable event. Based on candidate promises, the 2016 election was a crossroads for the estate tax, commonly referred to as the “death tax.” Whereas Donald Trump and Gary Johnson both promised to repeal the estate tax, Clinton laid out a vision of raising the estate tax to the highest level since 1981. Now, with tax reform on the agenda and President Trump in the White House, it’s time for Trump to make good on this campaign promise.
Currently, the estate tax is a 40 percent tax on all estates worth over $5.49 million. The estate tax exemption is indexed to inflation so that it increases slightly every year (the FY 2016 exemption was $5.45 million). Clinton’s plan would have reduced the exemption to $3.5 million, and set up three “estate tax brackets” of 50, 55, and 65 percent. The Tax Foundation estimated that this proposal would decrease GDP by 1 percent, and raise only $7 billion over ten years after accounting for macroeconomic impacts.
The reason for such massive economic harm resulting from one tax is that the estate tax is a poorly targeted tax that disincentivizes activities that promote economic growth. Rather than saving and investing, actions that are essential for sustainable economic growth, older Americans with sizeable estates are encouraged to spend as much of their money as possible to avoid the tax. This is why eliminating the estate tax would result in GDP growth of 0.9 percent, and reduce federal revenue by only $24 billion over ten years, after factoring in economic growth (an amount easily eclipsed by enacting recommendations in NTUF’s Common Ground study).
Ironically, a common argument made in favor of increasing the estate tax is that it can be avoided by careful financial planning. As Robert Wood points out in Forbes, it is a bit of a bizarre argument to advocate for a tax because people won’t actually have to pay it. Confusing logic aside, this is really another reason to do away with the estate tax. Wealthy individuals across the country spend millions of dollars annually on attorney fees to avoid the tax. These fees add nothing to the economy and represent a dead-weight loss, as money that would otherwise be saved or directly invested goes instead to lawyers.
The estate tax also discourages entrepreneurship. Entrepreneurs risk their children or heirs being hit with a large tax bill that would force the business to close if they should die, and oftentimes will avoid the risk altogether. In particular, family-owned businesses are at the greatest risk of having to be sold in order to pay the tax on inheriting the business. Even the government acknowledges this—specific provisions have been written into law to protect family-owned farms from the estate tax.
Nor is the estate tax an important part of federal revenues, even without factoring in dynamic changes to economic growth; less than one percent of federal revenue comes from the estate tax. Neither is it unusual for countries to go without an estate tax, as 16 out of 35 countries in the Organization for Economic Co-operation and Development (OECD) do not have an estate tax (Latvia was admitted to the OECD after the Tax Foundation study and does not have an estate tax). States are also increasingly doing away with their own estate taxes, and only 18 states and DC now have a separate estate or inheritance tax.
Congress and President Trump have a unique chance to repeal the estate tax. Polls consistently show that Americans don’t like the estate tax, and not because they don’t understand it. Both should make sure that any tax reform proposal contains a provision to finally rid Americans of a tax on dying.