The voices of Tax Policy Center's researchers and staff
That happens a lot with music: You love a song because it sounds good, even if you don’t know exactly what it means. That kind of obsession also affects our opinions on taxes—pro or, more often, con. “Dig if you will,” the federal estate tax.
It’s been in the news a lot over the past couple of weeks. This tax year marks its hundredth on the books. Then, Prince passed away, leaving an enormous, complex estate that could ultimately face a tax of up to 40 percent.
Despite the attention, the tax only affects the estates of a tiny number of very, very wealthy individuals. Yet tens of millions of us say we hate the “death tax” and want it repealed. This is curious, considering the growing focus on income inequality and resentment of the “one percent.”
This year, an individual owes no estate tax unless they leave $5.4 million to their heirs. With just a bit of planning, a married couple will pay no federal tax unless they have an estate of at least $10.9 million. Of the 2.6 million Americans who died in 2015, only about 5,000 estates paid the federal tax. The Tax Policy Center estimates that in 2014, estates of $20 million or more paid half the tax.
The federal estate tax is the most progressive in the Internal Revenue Code and has the capacity to reduce wealth inequality. Still, because Congress has generally increased the amount exempted from tax, it is a less powerful tool than in the past. The Congressional Budget Office estimates that the tax will generate about $246 billion over the next decade. That’s less than 1 percent of federal revenue over that period.
Public opinion surveys show just how conflicted Americans are about this tax. A recent Gallup poll finds that 54 percent of us would like to repeal the estate tax entirely. But 63 percent feel money and wealth should be more evenly distributed among a larger share of people, and 52 percent say that heavy taxes on the rich are a good way to do that.
That’s a remarkable contradiction. Maybe American opinion about the estate tax is like me and Prince’s “Little Red Corvette:” Strong feelings without strong knowledge.
Back in 2002, University of Michigan economist Joel Slemrod looked at how misconception drives support for certain kinds of tax reforms in the United States. He found that a whopping 82 percent of those surveyed wanted to kill the estate and gift tax. But nearly half thought that most families had to pay it. Another 20 percent didn’t know.
Nine years later, John Sides of George Washington University demonstrated that giving people the correct information about who actually pays the estate tax increases support for it. And just last year, a paper in the American Economic Review by Ilyana Kuziemko, Michael Norton, Emmanuel Saez, and Stefanie Stantcheva showed that informing people about the small share of decedents who pay the federal estate tax doubles support for it.
Then again, maybe political spin can, um, trump facts. Mayling Birney, Michael J. Graetz, and Ian Shapiro credited the ability of estate tax critics to win support for repeal by labeling it the “death tax” (and implying that average Americans would owe it).
Critics have their reasons to oppose the tax. They argue it may discourage work and saving and that it imposes a burden on farms and small businesses. They also say the estate tax is a “double tax” on money that was already taxed as income.
TPC’s Len Burman and Bill Gale addressed these concerns in 2005, when they proposed options to reform the estate tax. They argued that if you work and save less because of the estate tax, your heirs might work harder and save more since their inheritance will be smaller. Only a handful of estates of farmers or small business owners are subject to the tax (perhaps only 20 in 2013). As for estates being double taxed? Much of the wealth in taxed estates comes from untaxed capital gains.
Should estate tax supporters launch a massive education campaign to address these issues? (Should my parents have sat me down in 1983 and carefully explained the lyrics of “Little Red Corvette?” Would that knowledge have changed my opinion of the song?)
Perhaps, but a majority of Americans would still repeal the estate tax. Tax Analysts’ Joe Thorndike said last month that it’s time to face the fact that Americans just don’t like the levy. “The estate tax,” he writes, “is about the political perils of judgmentalism. In trying to make sense of the estate tax and its unpopularity, supporters of the tax might be better served by trying to understand popular attitudes rather than simply correct them.”
Maybe opponents just don’t like the idea of the government taking what could be passed on to family—no matter how much money the family has, how they got it, or how much wealth remains concentrated among the richest. Maybe Americans love family more than fairness. I can’t say I get it, but if that love's there, it’s not likely to disappear.
Now that, I do understand. Thirty-three years later, I still love “Little Red Corvette,” even though it’s not about a car.
The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. Need help or have an idea? Post a comment.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Rock singer Prince performs at the Forum in Inglewood, Calif., during his opening show, Feb. 18, 1985. (AP Photo/Liu Heung Shing)