I practice estate planning. Part of my work for clients is to help them reduce or avoid paying estate taxes. However, I support estate taxes as an equitable and necessary form of taxation.
Why the seeming contradiction?
While I believe that no one should pay more than his or her fair share of taxes, taxes are necessary to pay for government services, whether that’s roads, military, schools, police, or Medicaid coverage of nursing home care. Of course, the need to raise money for government purposes must be balanced with everyone’s need to pay living expenses and save for retirement.
If we agree that we need to raise money to pay for necessary government, why do I support estate taxes in particular, as opposed to income, sales or capital gains taxes? The answer is that I don’t support one form of tax over another, but that there needs to be a balance and at the moment we’re out of balance. We would have a more fair tax structure if we lowered the threshold for estate taxation and as a result were able to relieve some of the tax burden on working Americans.
Why is that? Fairness, equality and necessity.
In terms of fairness, estate taxes are progressive. Estates of anyone dying this year only have to pay federal estate taxes on the portion of the estate that exceeds $5.25 million. (This threshold increases each year with inflation.) No estate tax is paid on the estate passing to a surviving spouse and with a minimum of planning a married couple can keep at least $10.5 million free from estate taxation. (In Massachusetts, the threshold for estate taxation is $1 million, but the rate is much lower than the federal rate.) It is more fair to tax those who have had the most financial benefit from from our economy and institutions.
In terms of equality, one purpose of estate taxes is to limit the growth of a financial aristocracy. However under the current tax structure, only .14 percent of estates, or fewer than two out of a thousand. It makes sense that most Americans don’t have to pay estate taxes, but we’ve gotten to an extreme point. If 1 percent of estates paid taxes we raise funds from 10 estates out of 1,000, if 10 percent paid taxes, we would be at 100 out of a thousand. In 2008, the threshold was $2 million and it has increased in various jumps in the subsequent years. The chart on the right shows how the already low percentage of estates paying taxes already had dropped as a result of previous increases in the threshold.
Part of the strength of the United States is its belief in equality of opportunity. All should be permitted to achieve to their full potential. True equality will never be achieved. Parents love their children and want them to succeed. Those privileged with education, connections and wealth will pass these on to their children.
But as a society, equality of opportunity it is an ideal which we can and should strive to reach. To permit most of those owning the top 1 percent of household wealth to pass it on free of tax to their children and grandchildren flies in the face of this goal. Government can leaven the natural inequalities of society by taxing large estates and using it to provide excellent education, police and military protection, and employment opportunities for all Americans.
Turning to necessity, the failure to raise more money from more estates means that we must either (1) raise more money from other taxes, (2) cut spending, or (3) borrow more, further burdening future generations. In recent years, we have been taking all three steps while reducing the estates that are taxed. Part of the argument over estate taxes is really one of how government revenue should be raised — through income taxes, excise taxes, sales taxes, selling off natural resources, fees for services, tariffs, or estate taxes. With the United States facing huge long-term deficits, we need to raise more money from those who can afford to pay. Raising income taxes too high at some point become confiscatory and penalizes those who work for a living as opposed to those who simply inherit wealth. We will need to raise more money from large estates in order to meet our obligations to all Americans in the future.
To learn more about the current federal estate tax, click here.