Planning for Life

Should There Be a Tax on Just 2,000 Estates Each Year?

Posted by Harry S. Margolis on January 28, 2020

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By Harry S. Margolis

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With the current federal estate tax threshold set at $11.58 million (over $23 million for a married couple) in 2020, fewer than 2,000 estates are expected to pay any tax this year. That's out of more than 2.8 million deaths, or approximately 0.07% of all estates. (The threshold for Massachusetts estates is $1 million.)

About 52,000 estates paid federal estate taxes in 2000, before the long-term campaign to end the "death" tax took hold, with the threshold gradually increasing from $600,000 to $5 million (adjusted for inflation), to be doubled under the Trump administration. You can read a short history of the federal estate tax here.

The Effect of Tax Cuts

No one likes to pay taxes. But most of us pay them in order to support our government and social services. If a tax is reduced, then another needs to raised, government expenses cut, or the necessary funds borrowed. The Trump-Ryan tax cuts have resulted in the last solution, with the federal deficit growing from $438 billion in 2015 to over $1.1 trillion in 2019, with a similar projected deficit in 2020. (The "supply side" argument that tax cuts will boost the economy so much that increased tax revenue from additional income and capital gains will more than offset the effect of rate cuts has almost never panned out, and certainly isn't working now.)

Can We Borrow Forever?

The Keynesian model of government spending, which many of us learned in Economics 101, was that government should spend more during recessions and put money aside when the economy is strong, such as the last few years. More recently, some economists have questioned this—at least for the United States—which, in effect, prints the world's currency. The question is whether our growing debt of more than $17 trillion will ever have to be repaid. What happens when more and more Baby Boomers stop working and paying high taxes, and start drawing on Social Security and Medicare? Are we leaving a debt that our children and grandchildren will have to repay?

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Our current national debt stands at almost 80% of the gross domestic product. The Congressional Budget Office predicts that this will act as a drag on our economy, reducing economic output, increasing interest expenses, and reducing household income over time.

Does the Estate Tax Matter?

But back to the estate tax. Even when the threshold was just over $5 million, the estate tax contributed less than 1% of federal tax revenue—just over $19 billion in 2014. But every 1% counts. Cutting that out again means that more money will need to be raised through other taxes, programs cut, or increased borrowing.

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I should also point out that the richer you are, the greater you benefit from another effect of death on taxes. When property is passed on at death, its basis, which is used for calculating capital gain, gets adjusted to its value at the owner's date of death, enabling heirs to avoid this tax when they sell the property.

What Threshold Do You Think is Fair?

So, what should the right estate tax threshold be? Perhaps $600,000, the threshold before 2000, was too low. But a threshold of  $11.58 million, $23 million for couples, seems rather high. I should note that this high level is not permanent. The Trump-Ryan doubling of the threshold in 2017 could not get enough votes in Congress to become a permanent feature of our tax code; so it ended after 2016, dropping back to about $6 million for individuals and $12 million for married couples.

But I think that is also too high. I feel a threshold of $2 million, $4 million for a married couple payable only at the death of the second spouse, would be fair. Certainly these estates can afford to contribute to the public good a portion of the excess over $2 million or $4 million, depending on their marital status.

What do you think the federal estate tax threshold should be?

 

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Topics: Estate Planning, estate taxes, tax law

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