The Estate Tax: Posturing

How Congress is trying to mislead the public about the estate tax and its effects.

Yesterday, on Thursday, April 16, the House passed a bill repealing the estate tax. Unsurprisingly, the vote broke down along partisan lines, with only seven Democrats voting to repeal it, and three Republicans voting against it. It still has to get through the Senate, which will probably be where it dies. Even it gets through, however, the White House has already threatened to veto it.

So why the push?

Estate Taxes: Driving The Right Mad for a Century

Estate Taxes: Driving the Right Mad for a Century

Historically, the estate tax has served as a way to prevent wealth oligarchies. Adam Smith himself believed that the transfer of full estates to one’s heirs impeded the efforts of everyone else to succeed. It was, in effect, robbing the living to support the unearned exuberence of the sons and daughters of wealthy dead men. Thomas Jefferson and Tom Paine whole-heartily concurred with Smith.

Policy-wise, however, the estate tax ebbed and flowed with need, typically corresponding with war. Brief estate taxes existed in the late 18th century to raise funds for the navy in response to hostility from the French in 1794, to help pay for the costs of Civil War and Reconstruction, and as a result of the widespread economic downturn in the United States in the late 19th century. Rates and revenues from these early estate taxes were typically low–the Federal Government, after all, was much smaller, requiring fewer funds to operate. But perhaps most importantly, the concentrations of wealth were not, until the late 19th and early 20th centuries, enough to warrant more drastic efforts to break up economic oligarchies.

Cue the Gilded Age, where America witnessed the largest accumulations of wealth in the smallest number of hands that it had yet seen. Economic oligarchies gave rise to concentrations power that in the Progressive Era, sparked fears of an American plutocracy. Teddy Roosevelt, the trust buster himself, advocated for an estate tax and an income tax. His efforts eventually led to the 16th Amendment, which allowed a Federal income tax, but also fertilized the American political landscape for more progressive estate taxes.

The Revenue Act of 1916 created the first modern estate tax. Over almost a century since then, the elite most affected by this tax have fought tooth and nail to cripple it or outright abolish it. In its first iteration, the estate tax exempted $50,000, applying to net estates, with the max rate set at 10 percent.

Over the Depression years, the most significant changes were to the exempted amount and the top rate. Between 1916 and 1941, the top rate jumped from 10 percent to 77 percent, while the exemption actually fell to $40,000. In 1942, Congress altered the rates to exempt $60,000 with an initial tax rate of 3 percent and a top rate of 77 percent. These rates helped pay for both the New Deal, which drove the American public out of the grinding poverty of the Great Depression, and to fund the war effort in Europe. The rates, however, remained in place, relatively unaffected until the 1970s.

What was new then? Historians have long argued that the 1970s witnessed the culmination of a new brand of neo-liberal, business-minded conservatism that rejuvenated the stagnant American Right. Taxation was one of their primary targets. Between 1977 and 2007, the exemped amount skyrocketed from $60,000 to $2 million. That meant that an American’s estate was not deemed worthy of heavy estate taxes until it was worth over $2 million. To be fair, the initial tax rate also skyrocketed from 3 percent to 18, but over those same years, the top rate, which only affected the most wealthy of American elites, dropped from 77 percent to 45 percent.

The Bush Tax Cuts were perhaps the most startling preservation of old-money the United States had seen at one time. Not only did it temporarily abolish the estate tax for the year 2010 in hopes of some sort of economic boon (and making it a great year to die rich), it began the true rise of exemptions. In 2000 and 2001, before the tax cuts took effect, the exemption was $675,000. In 2002, it was $1 million. By 2014, Congress had pushed that up to $5.34 million. During that same period, the top rate dropped from 55 percent to 40 percent.

Keep in mind that this means that estates could only be taxed for the amount above the exemption. So if you, an only child and only remaining heir, lose your father who, as of 2014, bequeaths you $6 million, you only owe 40 percent on $660,000, since $5.34 million of that is exempt from taxes. You thus owe $264,000 on your total estate now worth over $5.73 million. Not a bad deal, right?

Not if you’re a Republican. In their latest assault on the estate tax–affectionately termed the “death tax”–they argue that it only really affects small businesses and the middle class. Apparently, there is large coterie of middle class people whose estates are worth over $5.34 million who are ruined by this tax. According to the bill’s sponsor, Republican congressman Kevin Brady,

Can you imagine working your whole life to build up a family-owned business or a farm, and then upon your death, Uncle Sam swoops in and takes nearly half of what you spent a lifetime building up for your children and grandchildren?

In the real world, the Joint Committee on Taxation, which includes Kevin Brady himself, as well as Paul Ryan and Orrin Hatch, estimated in a report issued last month that only 5,400 estates total were projected to be affected by the estate tax this year, comprising 0.2 percent of deaths in 2015. Republicans are pleading for the small farmer and the small business, but their policy outcomes only ensure a larger slice of wealth for the children of the 0.2 percent.

A quaint, middle-class farmhouse threatened by the estate tax.

A quaint, middle-class farmhouse threatened by the estate tax.

And to be fair, his point is grounded in what could be hardship. If the estate bequeathed to you is only in land or assets, one would presumably need to quickly liquidate a portion of those assets to pay the tax. Given the speed at which they would have to do this, it’s conceivable that many might have to sell for well under the assessed value, resulting in an even greater loss of the estate.

But that’s the point. Estate taxes liquidate portions of large estates to support government services that provide children of regular folks better opportunities to succeed. Spinning it any other way is a cynical move by a Republican party designed from the ground up to starve the beast. By putting this bill through, Republicans are shrewdly eying the White House in 2016. The candidates will all support it, and if it passes the Senate they will use the President’s inevitable veto as proof that he not the champion of the middle class.