Currently at 40% for estates that exceed $5.45 million, the federal estate tax is liked by neither candidate. While Hillary Clinton wants to raise it, Donald Trump says erase it.
Where are we going? To equitable solutions.
The Frugals and the Profligates
In a recent NY Times column, economist N. Gregory Mankiw described the Frugals and the Profligates. Both quite affluent, the Frugals were thrifty while the Profligates purchased large homes, extravagant vacations and pricey cars. Since each had the same top marginal tax bracket, their income tax totals were similar.
Their estate tax though was a different story. Because the Frugal children inherited more than the Profligate family, their estate tax bill was much higher.
Good or bad? This is where your feelings about fairness kick in.
But first, let’s anchor our discussion with several estate tax facts.
The U.S. Estate Tax
A High Rate
Remembering also that individual states can have a hefty estate tax, we can say that the estate tax in the U.S is relatively high. Among OECD (Organization for Economic Cooperation and Development) countries, our federal estate tax rate places us at #4. Meanwhile, below Italy, we could have listed 15 countries–including Australia, Canada, Israel, Mexico, Sweden and Norway–that have no estate tax.
More Exemptions
Affecting relatively fewer people. federal estate tax exemptions have risen:
Little Revenue
Less than 1% of federal revenue, estate tax receipts are relatively small:
Our Bottom Line: Fair Taxation
Let’s return to the candidates.
Horizontal and Vertical Equity
If equal tax treatment sounds fair, then horizontal equity is for you. Requiring that people with similar circumstances pay similar taxes, horizontal equity would not be a characteristic of the U.S. estate tax. Our example is the different amounts paid by the heirs of the Frugals and the Profligates.
By contrast, a vertical taxation focus can appeal to those of us who are concerned with income inequality. Useful for diminishing vast income and wealth differences, a vertical perspective can employ progressive taxation to increase what the affluent pay.
So, where are we? It appears that Donald Trump likes horizontal equity and Hillary is our vertical person. For both though, we should remember the tradeoffs. Eliminating the estate tax does cut revenue. But increasing vertical equity could diminish work incentives.
My sources and more: Dr. Mankiw presented an ideally brief description of horizontal equity in his NY Times column. As for replacing the estate tax, this Tax Foundation analysis has some answers while AEI presented an in-depth analysis of horizontal equity.
