Who Pays the Estate Tax? Do Only the Rich Pay the Estate Tax?
It is a myth that the estate tax hurts poor and middle-class Americans, only the richest Americans (0.2% of families) pay the estate tax.
The current estate tax (AKA “death tax”) of 40% only applies to estates over $5.49 million (or effectively $10.98 million per married couple) in 2017 dollars due to a lifetime exclusion that adjusts for inflation every year.
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.
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).
TIP: Trump’s 2017 budget cuts the estate tax completely calling it “a tax break for the middle class.” That doesn’t make much sense as only 0.2% of the wealthiest families in America will ever pay the estate tax.
TIP: Most estates, especially those of the ultra wealthy don’t pay the full rate, as they use deductions and loopholes. Furthermore, the average effective tax rate on estates is 17% with the average estate only being taxed on 1/6th of its total wealth. This might not be fair to those with estates just over the exclusion amount who pay the full 40% (a handful of families in a given year at best), but it doesn’t change the fact that only the wealthiest families in America will ever pay the estate tax. If you are claiming a $5.49 million (or effectively $10.98 million per married couple) estate, then you are not poor or middle class. That is an empirical fact.
Are Farmers and Small Businesses Hurt By the Estate Tax?
You might hear that farmers and small businesses are hurt by the estate tax when they pass along their business. That can be true when a business or farm worth over $5.49 million (or effectively $10.98 million for a family) of capital assets in 2017 dollars is passed along to the next generation.
Consider, Joe-the-farmer could have a farm worth $6 million that turns only a small profit. In this case paying a 40% tax on $500 thousand could be a sort of hardship for Joe’s kin (who don’t have the resources to exploit loopholes).
That means the estate tax isn’t perfect, and certainly a fair reform would seek to exempt those who are unfairly burdened (like, you know, an exemption for small farmers and businesses…).
With the above in mind, there are a few details worth considering on the topic of the estate tax:
- Capital (like a farm or small business) can appreciate untaxed (at 0%) if a sale is never made, and if a sale is made, it is taxed at the long-term capital gains tax rate of 20% max. This means most capital was never taxed at the full 39.6% income tax rate in the first place.
- Taxable estates generally only pay about one-sixth of their value in tax (a 17% average effective tax rate after the full exemption amount, other deductions, and loopholes). In other words, these estates aren’t exactly getting “double taxed” in most cases. Consider: If the capital is amassed via a 20% capital gains tax, then it is taxed again at a 17% average rate on the estate, the total tax burden is about the same as the top federal income tax rate of 39.6% that ALL high income workers pay. This doesn’t factor in other taxes… but neither does the federal income tax.
- Only about 80 small business and small farm estates nationwide will actually face the estate tax in 2017, according to the Tax Policy Center.
- Even a farmer who has to sell the farm is still a multi-millionaire after the sale (so they aren’t poor or middle-class).
- There are a ton of loopholes and deductions the rich can take to avoid the current estate tax (this is actually unfair in general and should be reformed, as it unfairly helps the ultra rich and hurts the “small business” and farmer).
- A Trump, a Kushner, a Koch, or a Walton is not exactly in the same boat as the farmer. Their capital is real estate, corporations, and other capital investments that grow at 5% a year on average and compound. Plus, when these few wealthy families do pay taxes, they pay the 20% capital gains tax, not the full 39.6% income tax everyone else pays! In other words, if we abolish the estate tax like Trump suggests, the rich get a giant tax cut and will pay less in taxes than even the highest paid workers. That isn’t fair, but fairness isn’t the problem here, the problem is the wealth gap!
TIP: See the table below for how wealth compounds over generations and why it must be taxed to avoid an unsustainable wealth gap.
Changes to the estate tax regarding the farmers and medium businesses need to be addressed in upcoming tax reforms. Perhaps we could consider a progressive tax on dollars over a threshold that goes from say from 10% to 40%; perhaps we could exempt certain estate types; perhaps we could allow an exemption based on profits, so those just above the line aren’t unduly burdened.
Who Pays the Estate Tax?
Occasionally a farmer or a medium sized business is subject to this tax, as we mentioned above, and there are some valid concerns with taxing the estates of this group at the full 40%.
However, it is a myth that low-income Americans, middle-class Americans, or anyone outside of the very wealthy are subject to the federal estate tax, or that they are otherwise burdened by the estate tax.
To inherit an estate of worth over $5.49 million (or $10.98 million per married couple) is to be wealthy by definition.
Even the farmer’s heirs who have to sell an estate that has been in the family for generations still end up with millions of dollars from the sale.
Thus, while we can note that the estate tax does affect some very specific families unfairly (like the farmer passing down the farm which turns very little profit generation to generation), in general the estate tax helps most economic classes.
Only the richest families pay the estate tax, only the 0.2% wealthiest families are subject to it (since the 2001 changes as you can see in the image below).
The estate tax is one of the only taxes on wealth in America, and it is essentially one of the only thing holding back the already alarming growth rate of the current wealth gap.
There is a lot, and I mean a lot, of effort that goes into trying to get the lower classes to support the repeal of the estate tax.
The whole reason people know it as “a death tax” is because it is part of what we can view as “a propaganda campaign” by special interests which are subject to the estate tax.
Clinton vs. Trump on the estate tax.
This is not to say that the estate tax is perfect, or that sometimes new businesses are hurt by it (see citations for some valid counter-points), it is only to say that those who are unfairly hurt aside, this tax applies to very few families and it is there for a reason.
Consider in 2006, a study found that among the top 5% of earners:
- Most of the wealth (92.5 percent) was from earnings and thrift.
- Only 7.5 percent was from an inheritance.
We can point to statistics like this all day, and then we can counterpoint by saying, but of all Americans, only the 0.2% or so of earners pay the estate tax. The rest of the top 5% of earners noted here don’t. It doesn’t affect them either!
We might also consider further exemptions for new businesses and farmers. Heck, we could even consider lowering the estate tax, raising the top marginal bracket, or offering other alternatives as noted above.
However, when it comes to passing down large estates generation to generation, there really does need to be some sort of estate tax to ensure against an unsustainable wealth gap.
Considering Trump is seeking to abolish the estate tax in his new Trump’s A New Foundation for American Greatness Fiscal Year 2018 budget. The reality that he and his circle will benefit bigly from this aside, people supporting the budget should at least understand that the estate tax will probably not affect them.
The bottom line here is that:
- The estate tax may be unfair to a very limited set of individuals with over $5.49 million (or double for a family) in wealth (adjusted for inflation) that they want to pass down to their heirs, but who can’t exploit deductions and loopholes.
- However, the estate tax is very fair to the people as a whole and the nation (as getting rid of the estate tax would increase the wealth gap, and an increasing wealth gap over time would most surely increase political, social, and economic inequality and pave the way for oligarchy).
If we don’t want the richest families to amass wealth and create an oligarchy, we should not abolish the estate tax. We can meet in the middle and reform it, but there is no logic in abolishing it (or at least it is not in the self-interest of the lower classes, as they don’t pay this tax).
“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 .01%) as an excuse to give his family 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.
TIP: “Estate” is a term that describes capital assets held by one person and passed down to another. The Estate Tax is a progressive tax on estates that only the wealthiest pay in most cases. The current estate tax only applies to estates over $5.49 million (or double for a family), adjusted for inflation each year. That means it only applies to roughly 1 in 500 families, and of those, not all pay the top marginal rate of 40%. The Wealth Gap is the gap between capital assets of the rich and poor. Oligarchy is a term that means government run by the wealthy.
The estate tax issue isn’t simple, so it helps to hear all sides. I’d argue that understanding the issue helps us to see 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 involved in taxation, we need to balance a number of factors at once. One important factor is incentive; another important factor 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.