Without getting into the rest of the GOP tax proposal, the provisions abolishing the estate tax should be rejected.
The exemption from the federal estate tax in 2017 is $5,490,000 per person. When a person dies, there is no estate tax on property passing to the spouse of the decedent or to property given to charity. Accordingly, a married couple may leave $10,980,000 to non-charitable beneficiaries, without any estate tax being payable. The exemption is tied into the cost of living, so the exemption normally increases each calendar year.
The tax is assessed on the net value (assets minus liabilities and costs of administration of the estate) of property passing to beneficiaries of the deceased.
The tax in its modern form has been around since 1916. Given the large exemption, according to the Joint Committee on Taxation, it is estimated that only two out of every 1,000 estates will owe the tax in 2017. Estimates are that repealing the estate tax would cost the U.S. Treasury $269 billion over a 10-year period.
One of the arguments against the estate tax is that it inhibits the passing of family farms and family businesses to the next generation. There are two provisions in the Internal Revenue Code that seek to alleviate this problem. As for farmland, the Internal Revenue Code allows the estate to value farmland as farmland, rather than at the arms-length, highest and best use valuation that applies to other forms of real estate. (This means that you value the farm based upon the income it produces, rather than establishing a value based upon what the land could be sold for.)
With respect to closely-held family businesses, an estate can pay any estate tax that is due over a 15-year period, at a low rate of interest, if liquidity in the estate is a problem.
The vast majority of estates that are affected by the estate tax generally consist of are estates whose assets include marketable securities (stocks and bonds) or non-farm real estate. The Tax Policy Center of the Brookings Institution and the Urban Institute (centrist think tanks) estimate that only 50 family businesses and farms will owe estate taxes in 2017.
The great philosopher of capitalism, Adam Smith, was of the opinion that an inheritance was justified only when necessary to provide for dependent children.
The steel magnate and industrialist Andrew Carnegie, who favored the estate tax, stated, “the parent who leaves his son enormous wealth generally deadens the talents and energies of the son and tempts him to lead a less useful and less worthy life than he otherwise would.”
Theodore Roosevelt was a strong proponent of the estate tax for many of the same reasons articulated by Carnegie. The repeal of the estate tax will only exacerbate the concentration of wealth in our society. According to a Congressional Budget Office study in 2013, the families in the top 10 percent held 76 percent of all family wealth, those families in the 51st to 90th percentiles held 23 percent of all family wealth, and those in the bottom half of the distribution owned 1 percent of total family wealth. Does anyone believe that the repeal of the estate tax will mitigate these trends? Does anyone believe that the repeal of the estate tax will result in more risk taking, economic growth and a more dynamic economy? Carnegie did not. All tax systems have their flaws, because they apply to everyone across the board. When you receive your annual property tax bill, your ability to pay the bill may be diminished as a result of sickness in the family, or some other calamity. Does anyone think that heirs who have already received $10,980,000 tax-free will have a hard time paying the estate tax bill?
Some will argue that the estate tax is a “double tax,” in that people who accumulate assets paid income tax on their earnings, which helped them acquire their assets. This is not always the case, for some people inherit assets that they in turn leave to their descendants. Moreover, if you define the income tax as the “first tax,” then all taxes are a form of “double taxation” in that you pay your property tax, sales tax, gas tax, tobacco tax, alcohol tax, phone tax and every other tax with after-income tax dollars.
There are some who believe that the estate tax is a penalty on the creative or industrious residents who accumulate great wealth. They see it as an “envy tax.” There is no doubt that many creative and industrious capitalists have produced goods that have redounded to the benefit of all members of our society. The standard of living for even our poorest residents is without a doubt far better than it was 100 years ago.
What this argument against the estate tax fails to take into account is the fact that every citizen’s wealth, regardless of how brilliant and hardworking that citizen may be, is owed, in part, to the institutions of this country. The rule of law, enforcement of contracts, patent protection, lack of corruption and sophisticated capital markets are what help make the accumulation of wealth possible. In addition, the infrastructure of the country, whether physical or human/intellectual, are all necessary parts of the nutrients in the soil of capitalism, which help the entrepreneurial plant grow.
Take Steve Jobs, Jeff Bezos or Sam Walton. If you place any one of these men in a developing country like Somalia without the ability to migrate, they might do well in comparison to the average Somalian, but they would not have amassed the fortunes that they did.
So the estate tax, besides discouraging concentrations of wealth, recognizes the debt the heirs of these entrepreneurs owe to the system that made their wealth possible. In addition, concentration of wealth and the hollowing out of the middle class means that in the future, there will be no middle class that can afford to purchase the next new invention. Like it or not, the economic well-being of the next new genius entrepreneur depends upon a healthy middle class and the economic institutions of this country. As the U.S. Supreme Court said in the 1940 case, Edwards v. California, “we sink or swim together.”
Richard Nordan of Raleigh is a partner in the law firm of Wallace and Nordan.