Estate of the union

Donald Trump’s most respectable economic idea is still amazingly bad

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“American workers have paid taxes their whole lives, and they should not be taxed again at death, and it’s just plain wrong.”

With these words, Donald Trump announced a central platform of his economic policy: repealing the estate tax.

That’s a policy which has been Republican orthodoxy for many years, for two big reasons. The first is that, obviously, repealing the estate tax would benefit rich Republican donors. The second is that, less obviously, repealing the estate tax is broadly popular. Whenever polls are taken on the issue, a substantial majority of Americans—somewhere in the region of 70%—say that they think the estate tax should be repealed.

This is, to say the least, weird. Almost nobody actually pays the estate tax, which is only paid by about 5,400 estates per year. To put it another way: of every 1,000 people who die each year, only two pay any estate tax at all. And those two people are very, very rich: the minimum amount of wealth you need to start paying the estate tax, after contributions to your spouse and to charity, is $5.4 million.

The racial wealth gap in America is much bigger than the racial income gap: according to a new report from the Institute for Policy Studies, black households have $85,000 in average wealth, while the equivalent number for white households is more than half a million dollars greater, at $656,000.

As a result of the wealth gap, the estate tax, which is pretty much the only wealth tax in America, falls overwhelmingly onto white families. Trump’s proposal isn’t just a $270 billion giveaway (that’s the amount that the estate tax is set to raise over the next ten years); it’s a $270 billion giveaway which is laser-targeted at rich white people like Donald Trump—the people who least need any kind of tax relief.

The government already encourages wealth formation in various ways, with subsidies for homeownership, higher education, retirement, and other savings. By one estimate, these subsidies amount to $660 billion per year. Which breaks down along predictable lines: $146,973 per year for the average millionaire, and $174 for the average working family. In other words, the government’s attempts at encouraging Americans to build wealth are already very good at helping the (mostly white) families who are rich already, and very bad at helping communities which have relatively little wealth to begin with. Repealing the estate tax would only widen the gap.

What’s more, there’s nothing “wrong” or unfair about the estate tax. The effective tax rate on estates of more than $20 million is 18.8%. And while the Trump children, and other heirs to large fortunes, are surely looking forward to their inheritances, 81.2% of an eight- or nine- or even ten-digit bequest is still an enormous sum of money. I’m sure they’ll get by somehow.

A common complaint among conservatives is that the estate tax constitutes “double taxation.” They say: this just a way of taking money which has already been taxed once, when it was earned, and then taxing it again.

But in many cases, large estates contain assets that have never been taxed at all. For instance, take someone who bought a New York City apartment in the 1970s for $100,000, which is now worth $10 million. No tax has ever been paid on that capital gain, and if the estate isn’t taxed at the time of the owner’s death, then all of that wealth could remain untaxed forever.

What’s more, there’s nothing wrong, in principle, with double taxation. That’s how taxation works: money sloshes around from one set of hands to another, and most of those transactions are taxed. Almost every way that we have of getting richer, is taxed. We get taxed when we make money in income; we get taxed when we make money in capital gains; we even get taxed when we make money by winning the lottery. There’s no reason not to tax people when they make money by being the lucky recipients listed in a rich person’s will.

In general, it’s a good idea to tax things you want less of, like tobacco, or wealth inequality. And if you have to raise money somehow, then taxing rich people who aren’t around to spend their wealth any more seems like a pretty sensible way of doing so.

So why is the estate tax so unpopular?

The answer is, simply, inertia. We’re OK with income taxes and property taxes and sales taxes because we’re used to them, but we’re not OK with wealth taxes, because we only have one wealth tax and almost nobody pays it.

Maybe the way to make the estate tax more acceptable, then, would be to start making wealth taxes more common. Start with a small 1% tax on all wealth over, say, $50 million, and see what happens. Extreme wealth inequality is bad for society, so let’s start making taxes on extreme wealth a normal and unremarkable thing. With any luck, that should put an end to these constant Republican demands to repeal the estate tax entirely.