EDITORIAL: Inequality and the estate tax

Nov. 06--As part of their new tax reform plan, House Republicans would set in motion the repeal of the federal estate tax. First, the proposal calls for doubling the exemption -- to $11 million, or $22 million for a couple. Then, the levy would disappear entirely by 2024. That would be unfortunate in this time of widening income equality.

President Trump has been among the most aggressive critics of the estate tax, recently telling an audience in Indiana: "To protect millions of small businesses and the American farmer, we are finally ending the crushing, the horrible, the unfair estate tax, or as it often is referred to, the death tax."

What the president doesn't say is that a weakening of the estate tax, especially the past 15 years, has reduced dramatically its reach. Today, a mere 0.2 percent of estates face the tax. That compares with 2.2 percent in 2001.

As FactCheck.org has noted, 2.5 million people died in 2015, yet just 4,918 people paid the estate tax. It also points to an estimate from the Tax Policy Center that just 50 farms and closely held businesses will pay the estate tax this year. So the number isn't in the "millions," or even the hundreds.

The current exemption is $5.5 million, or $11 million for a couple. That puts the exemption at its highest level (in real dollars) since start of the tax a century ago. Doubling the exemption, let alone eliminating the tax, would represent a more substantial departure. Recall that the tax, with its top rate of 40 percent, applies to the sum above the exemption level. Thus, if the estate of a couple is $16 million, the tax applies to $5 million, the levy approaching $2 million, or an effective tax rate of slightly more than 10 percent.

For their part, House Republicans would deliver a big tax cut to the country's largest estates. With the exemption applying to the next $11 million, another $4 million or so would stay with heirs.

One idea behind the estate tax is that great fortunes reflect the circumstances in which they were achieved, many contributing, including the community as a whole. So a share goes back. No one is taxed at death. The heirs are taxed, and as analysts explain, the estate tax often serves as the only levy on many "unrealized" capital gains.

Isabel Sawhill and Eleanor Krause of the Brookings Institution recalled in a post last week that in 1972, the top estate tax rate was 77 percent. They calculated that if the tax today raised the same share of revenue it did then, the sum would be about $85 billion. They propose using such an amount to ease income inequality. They suggest something like a worker tax credit for those with low or modest incomes, adding up to $1,500 a year to household incomes.

Another proposal, which they cite and advanced by U.S. Sen. Sherrod Brown, would expand the reach of the Earned Income Tax Credit to lower-income workers without children. This would help correct the shortcomings of a pay market that has driven virtually all new income to the top rungs. It makes a case for strengthening the estate tax, or at least abandoning the concept of a larger exemption, not to mention repealing the levy.

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