Getting Rid of the Estate Tax Would Increase the Wealth Gap fact


The Effects of Abolishing the Estate Tax (“the Death Tax”)

The estate tax (“death tax”) is one of the taxes preventing an unsustainable wealth gap; eliminating the estate tax would increase the wealth gap.[1][2][3][4][5][6][7]

Or more specifically, getting rid of the estate tax (which only the 0.2% of America’s wealthiest families pay) would arguably increase the wealth gap rapidly over a short period of time due to the way returns on capital compound.

This in turn would almost certainly lead to America becoming more oligarchical, as an oligarchy is a system of government in which wealth equals power.

That may sound like a bold claim, but it is really just a logical conclusion based on simple economics.

If capital returns compound, and we don’t tax the wealth back out, then wealth consolidates over time into the hands of a few families who can then use their fortunes to influence government. That by its nature is “oligarchy.”

The fear here is that the consolidation of wealth, and thus political power, could lead to political, social, and economic inequality and unrest over time, and thus lead to an environment in which oppression or revolution would become more likely (given history).

The above truisms are a real concern as Trump’s 2017 budget (which calls the estate tax “a death tax”) calls for abolishing the estate tax completely. To add insult to injury, in the budget abolishing the estate tax is “Tax relief for American families, especially middle-income families.” This is misleading as only the very wealthy are subject to the estate tax.

Listen to the exchange between Bernie Sanders and Mick Mulvaney where they discuss Trump’s budget regarding cuts to assistance programs and the estate tax.

TIP: The estate tax is a tax of 40% on every dollar over $5.49 million (or effectively $10.98 million per married couple) in 2017 dollars. That means it only applies to roughly .02% of families in the U.S. (according to the center on Budget and Policy Priorities) in its current form. That means one could claim a $10.98 million estate (passed down by a family) and pay no taxes, but every dollar claimed after $10.98 million would be subject to the 40% estate tax.[8][9]

Bernie Sanders vs. Mick Mulvaney EPIC Exchange On Budget Health Care Estate Tax 5/25/17.

NOTES: There are many loopholes and deductions the very rich can take to pay a much lower effective tax rate than 40%. Also worth noting is that the tax does impact some medium sized businesses unfairly. For perspective there are about 80 farms and “small businesses” in a year subject to the estate tax. These things must be factored in to our overall theory, but they do not change the conclusion. SEETen Facts You Should Know About the Federal Estate Tax.

Definitions of Estate, Estate Tax, Wealth Gap, and Oligarchy

To understand the above, it helps to understand a few terms as they relate to our subject:

  • “Estate” is a term that describes capital assets held by one person. Large estates are taxed when they are inherited. This is done via the estate tax (and in some states, an additional inheritance tax).
  • The Estate Tax is a tax on large estates. It is a tax that only the wealthiest pay by necessity as the current estate tax only applies to estates over $5.49 million, adjusted for inflation. That means, fair in every case or not, people inheriting large estates pay 40% on every dollar over $5.49 million in 2017 dollars (or effectively double for a family). That means it only applies to roughly .02% of families in the U.S. in its current form). Learn more about the Estate Tax from the Fool or learn how families can pass on more from Ward and Smith.[10][11][12]
  • The Wealth Gap is the gap between capital assets of the rich and poor. A 5% of return on capital gains each year means those with more money can grow their wealth faster than the economy (which grows at about 2%-3%). This means the wealth gap compounds over time (unless some wealth is taxed back out).
  • Oligarchy is a term describing a government run by the wealthy.

As you can see, not many families pay the estate tax. The point of the tax isn’t to tax many estates; it is to tax the few biggest estates and prevent an unsustainable wealth gap over time.

FACT: According to the Tax Policy Center 99.8% of estates owe no estate tax at all (and conversely 0.2% do). Of those who owe the estate tax: The top 10% of income earners pay nearly 90% of the tax, with over one-fourth of that paid by the richest 0.1%. Few farms or family businesses pay the estate tax (about 80 total in 2017).

Why Would Getting Rid of the Estate Tax Put America at Risk of becoming more Oligarchical?

The reasoning that getting rid of the wealth tax would increase the wealth gap and thus lead to our political system becoming more oligarchical is straightforward.

  1. The rate of return on wealth is higher than the economic growth rate (especially since the 1980’s), or r > g (where r is the rate of return to wealth and g is the economic growth rate).
  2. The estate tax currently taxes some wealth passed between generations offsetting the potential wealth gap created by the top 1%’s ability to grow their capital faster than the economy over time.
  3. Without the estate tax, the richest families in America could grow their wealth faster than the economy over time and then pass that wealth down generation to generation exponentially outpacing everyone else (as capital begets more capital, and thus the rich would save increasingly more while the lower classes continued to save less).

The effect of the above would be the consolidation of wealth (capital) into fewer and fewer hands over time.

This would likely lead to the U.S. becoming increasingly oligarchical (unless it was replaced with other taxes on wealth).

In America we already have concerns that those who control the capital control the government, especially given the proliferation of policies like Citizens United and the fact that public opinion doesn’t influence 90% of policy decisions according to Represent.Us. (see the theory that America is an oligarchy).[13]

We joke about “the United States of Walmart,” but repealing the estate tax ensures it.

Walmart is a valuable company, but they are also a classic example of a large company whose low-paid workers depend on subsidies and whose owners would benefit greatly from the elimination of the capital gains tax. Walmart is owned by second-generation inherited wealth and their workers depend on the very assistance that Trump’s budget cuts. That is why I am using them here as an example.

Thus, the reality is that the wealth gap is already widening and there are already aspects of oligarchy in America today. This is arguably where some of our political, economic, and social inequality is coming from in the modern day (in this “new gilded age”).

TIP: A Trump’s or a Buffet’s capital isn’t a farm; it is real estate, corporations, and other capital investments that grow at 5% a year on average and compound. Most of those gains either appreciate in value mostly untaxed outside of property taxes or are taxed at 20% long term capital gains tax if and when the capital is claimed. That means these families aren’t paying the same 39.6% income tax a high earner pays. In fact, when you consider that the average effective tax rate on estates is 17% (of total value) after the $5.49 million exemption, loopholes, and deductions, and that capital gains is only 20%, the estate tax is really only helping to ensure the ultra wealthy pay the same rate as the rest of the high earners (who get their income in wages and short term capital gains). See the table below for how wealth compounds over generations and why it must be taxed to avoid an unsustainable wealth gap.

A chart from Piketty’s Capital showing how capital growth leads to a wealth gap over time.

Learning More About the Estate Tax and Why It is Vital to Our Democracy

Below are some different videos that will help illustrate different views on the estate tax.

The video below, by notably liberal economist Robert Reich (who thinks we should raise the estate tax on the very rich, but not on others subject to it) presents his view on this below.[14]

Consider comparing it to the notably libertarian Milton Friedman video below, and to the notably conservative Fox Business video below that for a different perspective.

The estate tax issue isn’t simple, so it helps to hear all sides. With that said, I’d argue this fact helps us to understand why “abolishing the estate tax” is too simple of an answer to be the right one.

The Big Picture: Raise the Estate Tax.

TIP: Some like Milton Friedman will argue, “part of what drives people to work is their families, so the estate tax is bad because people won’t work as hard.” There is logic in that theory. However, one could argue that a reasonable estate tax still leaves a person with enough wealth to pass on to create maximum incentive. That is why it is important to have a reasonable, not oppressive, estate tax. With all things to do with taxation, we need to balance several factors at once. One important factor is incentive; another is preventing the wealth gap from spiraling out of control and creating an oligarchy. Almost everything in life is a trade-off. To Milton’s point, a 100% inheritance tax is just as bad of an idea as abolishing it. Be wary of absolutists.

Milton Friedman Redistribution of Wealth and the Death Tax.

TIP: The general logic also applies to the gift tax and the inheritance tax (which some states have). If there were no gift tax but an estate tax, then everyone would just give capital as gifts instead. These taxes should be thought of together.[15]

Clinton vs. Trump on the estate tax.

Trump is Proposing to Abolish the Estate Tax

Not only is the above true, but it is one of the main problems facing us in 2017 although many people don’t realize it. This is because, as noted above, Trump is seeking to abolish the estate tax. See Trump’s A New Foundation for American Greatness Fiscal Year 2018 budget.

Specifically, Trump’s Fiscal year 2018 budget seeks to abolish the estate tax (the death tax) under the guise of “tax relief for American families, especially middle-income families” (which is odd language, as only the rich pay this tax).

That budget would have to be approved by Congress. If Congress does approve it, its passing could rapidly increase the wealth gap and move America toward oligarchy.

However, it wouldn’t just lead to any oligarchy, but specifically it would lead to an oligarchy in which the Trump family and its closer circle (with their large families and wealth) would be toward the top.[16]

“Tax relief for American families, especially middle-income families, should…

…abolish the death tax, which penalizes farmers and small business owners who want to pass their family enterprises on to their children.”

-Trump’s budget using the middle-class (who don’t pay the estate tax) and the farmer (who is hardly in the same class as the top .02%) as an excuse to give his family and other wealthy families the biggest tax break in recent American history.

Bernie Sanders and Bill Gates on the Estate Tax (3/7/2007). People like Bernie, Buffet, and Gates favor a modest estate tax that can help prevent the wealth gap. People like Trump and the Kochs do not. Both sides have good points, but data suggests the wealth gap is a real problem that should be addressed. When we consider these figures use their capital to influence public opinion, we can be assured that our theory that money is power and wealth gap creates an inequality of political power is correct.[17]

TIP: For a simple breakdown of Trump’s plan, see: A New Foundation for American Greatness Fiscal Year 2018 Talking Points.

The Families Who are Around When the Tax is Cut “Win.”

Cutting the estate tax would be unsustainable, so only those families around right now could benefit.

Eventually, the estate tax would have to be reinstated, but by that time the current wealthiest families would have already established their wealth (due to the way capital compounds).

There is no point in this outside of the enrichment of special interests. If one wants to protect the farmer, then exempt the farm.

All cutting the estate tax does is create the sort of unequal environment which has historically led to hyperinflation or revolution.

A Better Solution For the Estate Tax

Instead of eliminating the estate tax, a better move might be to exempt certain types of wealth or to offer a more progressive estate tax with less loopholes (that accounts for different types of wealth and sizes of large estates, and that taxes the wealthy and very wealthy proportionally).

We should not be taxing the farmer’s farm if this would truly hurt the family business. So we could consider profits and expenses over a ten year period (and we could do this for other similar types of estates like “small businesses” subject to the estate tax).

We could also simply have much higher tax brackets, so we only truly tax the very very wealthy of any generation at the highest rate. Obama did this a bit, but we could do it even more (this must be paired with eliminating loopholes the very wealthy alone can take however).

People mistake this as being about punishing the rich, but that isn’t what it is. It is about ensuring democracy and the republic from oligarchy!

There has to be a middle ground between taxing Joe-the-farmer out of business and eliminating the estate tax on the ultra wealthy like Trump’s budget suggests. That middle ground is the only reasonable and ethical solution.

An argument for how Trump’s tax plan could exacerbate inequality. More on Tax cuts and inequality.

The Bottomline on Eliminating the Estate Tax

According to Trump’s A New Foundation for American Greatness Fiscal Year 2018 budget the plan is to abolish the “death tax” (the estate tax).

This is arguably worse for America in the long run than every penny cut from assistance and every penny spent on any other program, because this doesn’t just affect today, it affects the future of America (a future in which more will need assistance).

Thomas Piketty: New thoughts on capital in the twenty-first century.

FACT: Carnegie favored a progressive estate tax in his 1889 essay Gospel of Wealth, in which he attempted to codify the responsibilities of the new rich. Likewise, the main point of Thomas Piketty’s modern economic classic, Capital in the 21st Century, is to warn of the dangers of the wealth gap and to offer a small global estate tax as a solution. Meanwhile, the closely related work, David Callahan’s The Givers: Wealth, Power and Philanthropy in a New Gilded Age, describes the wealth gap in relation to Philanthropy and money in politics. This is no small part of what is dividing our nation and globe, as Carnegie foresaw.  We should not ignore the warnings of people like Carnegie, Callahan, and Piketty. The estate tax isn’t always fair. The plight of small farmers is real, and some with low profit margins are in an especially difficult position. We do need to help them. However, the estate tax became law for a reason. We could make it fairer and be better off for it, but if we abolish it we are all but ensured oligarchy. America is already a bit of an oligarchy, but I’d argue you ain’t seen nothing yet if this budget item passes.

The Givers: Wealth, Power, and Philanthropy in a New Gilded Age.

Article Citations
  1. Will Trump Victory Yield Estate Tax Repeal?
  2. Who wins if Trump repeals the estate tax
  3. Rethinking the Estate and Gift Tax
  4. It’s Fair, and We Need the Revenue
  5. Death and Taxes and Fairness
  6. The Estate Tax: Efficient, Fair and Misunderstood
  7. Ten Facts You Should Know About the Federal Estate Tax
  8. Repealing Federal Estate Tax Would Likely Deprive States of Needed Revenues and Tilt Tax Systems Toward Wealthy REVISED MAY 2, 2017 BY IRIS J. LAV
  9. Ten Facts You Should Know About the Federal Estate Tax
  10. Estate Tax
  11. 2017 Estate Tax Rates
  12. Basic Estate Tax Planning For Married Couples: Opportunities For Use Of Estate Tax Exemptions
  13. Represent.Us
  14. #8. RAISE THE ESTATE TAX ON THE VERY RICH
  15. Rethinking the Estate and Gift Tax
  16. Trump’s A New Foundation for American Greatness Fiscal Year 2018 budget
  17. Kochs unveil campaign to ‘jolt’ stalled tax debate
Conclusion

Repealing the estate tax is a recipe for oligarchy, it takes the biggest problem facing the globe today and makes it worse. There are a thousand ways to reform the estate tax and a thousand less disastrous tax cuts. Judgements on an exponential wealth gap aside, it is a fact that eliminating the estate tax would grow the wealth gap.


Author: Thomas DeMichele

Thomas DeMichele is the content creator behind ObamaCareFacts.com, FactMyth.com, CryptocurrencyFacts.com, and other DogMediaSolutions.com and Massive Dog properties. He also contributes to MakerDAO and other cryptocurrency-based projects. Tom's focus in all...

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