Under Hillary Clinton’s estate tax proposals, those standing to inherit multi-million or billion dollar estates would face significant tax increases. Donald Trump has opposed estate tax increases and has supported repealing the tax altogether. In general, only a few wealthy people must pay estate tax, thus, most middle-income Americans are not directly impacted by the tax. So, why are the candidates raising this issue? Should middle-income Americans even care about the proposed estate-tax increase or is this just another rich-people problem?
Hillary Clinton’s Estate Tax Proposal
Estate tax is a tax on property left to the beneficiaries of an estate. Under current laws, only estates worth over $5.45 million (or $10.9 million for married couples) must pay estate tax.
Mrs. Clinton’s proposed plan would increase the current 40% tax rate for the largest estates and would reduce the exemption amount. Mrs. Clinton has proposed a 50% rate for single estates exceeding $10 million and a 65% rate for single estates exceeding $500 million (or $1 billion for married couples). Mrs. Clinton would also reduce the exemption, so estates exceeding $3.5 million would pay estate tax. Mrs. Clinton’s proposal, if enacted, would be the highest estate tax rate since 1981.
Estate tax usually has no direct impacts on middle-income Americans. Since the threshold is in the millions, only 0.2% of estates in the U.S. must pay estate tax. But, the estate tax can have many indirect impacts on middle-income Americans.
Benefits of an Estate Tax Increase on Middle-Income Americans
Mrs. Clinton’s proposal could indirectly benefit middle-income Americans by relieving extreme wealth inequalities in the United States. When estate tax rates decreased in 1982, wealth inequality skyrocketed. In 1982, the 400 wealthiest Americans held under 1 percent of the nation’s wealth. Today, the wealthiest 400 own over 3 percent of the nation’s wealth, with the top tenth of the top 1 percent holding as much wealth as the bottom 90 percent. If the trend continues, the wealthiest 400 could control 10 percent of the nation’s wealth within the next 40 years.
Estate tax proponents argue more drastic rate increases are needed to remedy wealth inequalities. The rich accumulate wealth faster than the rest of us because they derive most, if not all, of their income from investments. Furthermore, there are many loopholes in the Internal Revenue Code that can be used to significantly reduce the amount of property subject to estate tax. Under Mrs. Clinton’s plan, a $1 billion married couple’s estate would still produce $460 million after taxes to the beneficiaries. Mrs. Clinton’s plan would only slightly slow wealth accumulation.
Estate tax increases could also generate more tax revenues and help alleviate deficits which could lessen tax burdens on working taxpayers. However, many argue that the costs of administrating the estate tax cancel out the increased revenues. Thus, the revenue increase would unlikely impact middle-income Americans.
Negative Impacts of an Estate Tax Increase on Middle-Income Americans
Arguably estate tax could have direct negative impacts on some middle-income Americans. Estate tax may pose hardships on family farms and small companies meeting the $5.45 million threshold. Many smaller family-owned businesses face management difficulties upon the death of the main owner. In addition to management difficulties, taxes can lead to a forced sale of the business. Estate and tax planning can help reduce estate taxes for these companies, but many times death can be unexpected and difficult to plan for. Mrs. Clinton’s proposal to reduce the exemption amount to $3.5 million could negatively impact even more small businesses.
Estate taxes pose several ethical questions as well. Critics argue that estate tax leads to double taxation because a person is taxed on his or her income earned during life, and then their estate is taxed at death. However, double tax is not an issue for many modern-day wealthy Americans because much of their income is from unrealized capital gains, and thus, was never taxed during life. Critics of estate tax also argue that when people work hard during life, they should have the right to pass their success to their children. Deterring wealth transfers from generation to generation could discourage entrepreneurship and investment which would negatively impact the U.S. economy.
It is clear both the middle class and wealthy would be impacted, on some level, by Mrs. Clinton’s proposed estate tax increase. So, no, estate tax is not just another rich-people problem.
Authored by Robin Sheehan, LegalMatch Legal Writer