Today, Senator Bernie Sanders (I-VT) introduced a plan to make the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. more progressive, in hopes that this wealth transfer taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. will raise as much as $315 billion over ten years, and as much as $2.2 trillion from the estates of current billionaires after their passing. Sanders’ top marginal rate would return the estate tax to its historic high of 77 percent—the top rate that existed from 1942 to 1976.
But despite the progressivity, there is good reason to believe Sanders’ plan won’t raise revenue as intended.
Currently, the estate tax levies a 40 percent tax on the total value of property passed to heirs beyond a roughly $11 million exemption for individuals ($22 million for married couples). Sen. Sanders’ plan would:
- Reduce the exemption to $3.5 million, and tax the value of estates up to $10 million at a rate of 45 percent
- Tax estates valued between $10 million and $50 million at a rate of 50 percent
- Tax estates valued between $50 million and $1 billion at 55 percent
- Tax estates valued at more than $1 billion at a rate of 77 percent.
This progressivity could hamper revenue collections for a few reasons.
For one, this tax on the wealthiest would target a small number of taxpayers (0.2 percent of the country, according to Sen. Sanders) with relatively high marginal tax rates that increase with an estate’s value. Because of the high rates and the progressive rate structure, high-net-worth individuals will have a strong incentive to shelter their assets to avoid the tax.
In general, tax avoidance is costly both from an economic standpoint (because it encourages unproductive tax planning) and a revenue standpoint, as people hide their money from tax collectors. But the estate tax generates particularly large compliance costs. In fact, research has shown that the compliance costs associated with estate planning are actually greater than the revenue the estate tax generates.
And perhaps most importantly, Sen. Sanders’ plan is problematic because it would increase the estate tax’s burden on investment, a key driver of economic growth. To the extent that Sanders’ plan encourages people to consume their income instead of invest it, it will reduce economic output, and with it, government revenues on a dynamic basis. This is because reductions in the size of the economy reduce the output available to government to tax.
While progressivity may look appealing—particularly at a time when policymakers in Congress seem to be competing on how best to extract revenue from the wealthiest in the country—it may not raise the revenue intended.
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