William G. Gale, Christopher Pulliam, John Sabelhaus, and Isabel V. Sawhill, of The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, the Center on Children and Families, Washington Center for Equitable Growth, and also the Center on Children and Families respectively, have made available for download their article, Taxing Wealth Transfers Through an Expanded Estate Tax, published in Brookings. The abstract is as followed.
American political leaders are currently focused on policies to address the health and economic implications of the COVID-19 pandemic. Nevertheless, it is not too soon to consider policy changes that could be beneficial to implement after the crisis has passed.
The U.S. faces two related and persistent threats to long-term, shared prosperity: growing inequality and rising federal debt. Inequality, especially wealth inequality, has risen sharply over the past 40 years. Children from different socioeconomic backgrounds do not have the same opportunities to achieve the American Dream. The Black-white gap in social mobility is especially concerning. The government’s budget outlook has long been a concern, with the federal debt projected to rise continually relative to the size of the economy, because of an aging population, rising healthcare costs, and inadequate revenues. The pandemic has made each problem more difficult to solve.
Policy makers should be looking for ways to address both issues. One place to start is by raising taxes on the most well-to-do households. During the Democratic primary, there were several proposals for a wealth tax, which would target the richest Americans and raise substantial amounts of revenue. Although a wealth tax would face difficult questions regarding its administrability and constitutionality, proposals for such taxes have re-energized the debate about taxing the wealthy. In some ways, the discussion has shifted from debating whether the rich should pay more in taxes toward determining the best way to achieve that goal.
In this policy brief, we consider the virtues of expanding the estate tax. Coupled with the gift and generation-skipping tax, the estate tax directly targets the intergenerational transfer of wealth. Whether it is ultimately borne by decedents or inheritors, the estate tax is extremely progressive. Inheritances are a major contributor to growing wealth inequality—large inheritances tend to flow to already wealthy heirs. The top ten percent of households by wealth receive 56 percent of all intergenerational transfers, while the bottom half receives only eight percent.
The estate tax is already part of the tax code. It has been administered – albeit imperfectly – for decades.
As a backstop to the income tax, the estate tax raises a significant share of its revenue from taxing the capital gains that wealthy decedents have avoided paying while alive. The estate tax also encourages charitable giving, both by providing a deduction for charitable gifts and by amplifying the effect of the income tax deduction for charitable giving.
Using a newly developed model based on household-level wealth and a mortality adjustment based on recent academic research, we present revenue estimates that show that under a variety of policy scenarios – including returning the (inflation-adjusted) exemption threshold and the estate tax rate schedule to their values in recent decades – an expanded estate tax could raise significant amounts of revenue.
Posted by David Brito, Associate Editor, Wealth Strategies Journal.