How Much Revenue Would Hillary Clinton’s Billionaires’ Tax Raise?

September 22, 2016

This morning, Hillary Clinton’s campaign announced a proposal to significantly increase the federal estate tax. Among other things, the proposal would increase the top estate tax rate to 65 percent for estates worth more than $1 billion, modeled off of the “billionaires’ surtax” proposed by Bernie Sanders. However this change would be largely symbolic: the new estate tax bracket would likely raise less than $1 billion annually and apply to fewer than a dozen estates a year.

Details of the Proposal

Currently, the federal estate tax is levied at a top rate of 40 percent on estates worth more than $5.45 million. Under Clinton’s proposal, estates worth more than $3.5 million would face a set of rates ranging from 45 percent to 65 percent:

Estate Tax Rates Under Current Law and Clinton Proposal

Value of taxable estate

Rates

Single filers

Married couples

Current Law

Clinton Proposal

$3.5 million – $5.45 million

$7 million – $10 million

0%

45%

$10 million – $10.9 million

0%

50%

$5.45 million – $10 million

40%

45%

$10 million – $50 million

$10.9 million – $50 million

40%

50%

$50 million – $500 million

$50 million – $1 billion

40%

55%

$500 million +

$1 billion +

40%

65%

Note: This table is based on the interpretation of Clinton’s plan by the Committee for a Responsible Federal Budget.

As the table above shows, the Clinton proposal would effectively levy a 10 percent additional tax on the value of estates above $1 billion (or above $500 million, for the estates of singles). How much federal revenue would this feature of the Clinton estate tax proposal (the “billionaires’ tax”) raise?

Which Individuals are Rich Enough to Be Subject to the Tax?

It turns out to be quite easy to estimate how much revenue a billionaires’ tax would raise, because there is an organization that publishes a list of literally every individual who could potentially be subject to such a tax. Every year, Forbes magazine publishes a list of every billionaire in the world, their net worth, their age, and their country of origin. Using the data on this list, we can estimate how much a billionaires’ tax, such as the one proposed by Clinton, would raise.

In 2016, Forbes estimates that there are 540 individuals in the United States with more than $1 billion in wealth. These individuals range from 25 years to 100 years old; 43 have a net worth of more than $10 billion, while six have more than $40 billion in wealth.

However, the definition of wealth according to Forbes is often different than the definition of wealth according to the IRS. Wealth is sometimes difficult to measure, and high-income individuals have every incentive to make their estates look as small as possible to the IRS. By comparing the Forbes net worth estimates to IRS estate tax returns, academics have found that for every dollar of personal wealth estimated by Forbes, individuals will tend to report 50 cents to the IRS for estate tax purposes.

And there’s more: because the federal estate tax allows for several credits and deductions (including a deduction for charitable bequests), not every dollar of net worth that is reported to the IRS is subject to the estate tax. In fact, among estates larger than $50 million, on average, the taxable portion of each estate is about 30.7 percent of the “gross estate.”

This means that, out of the 540 billionaires in the United States, many of them would not have a large enough taxable estate to be subject to Clinton’s billionaire tax, were they to pass away. In fact, I estimate that only 197 individuals have a large enough net worth, according to Forbes, such that they would report a taxable estate of more than $500 million to the IRS in the event of their death.[1]

How Many of These Individuals are Likely to Pass Away?

Of course, most of the 197 billionaires in question are very likely to stay alive throughout the next year; according to Forbes, this group is 67 years old on average. So, to estimate how many billionaires we should expect to pay Clinton’s proposed tax in the first year of its enactment, we need a set of assumptions about mortality rates by age.

The Social Security Administration publishes a set of actuarial tables that predict, on average, how likely an individual at any given age is to pass away in the upcoming year. For instance, the tables predict that a 60-year old male has a 1.1 percent likelihood of dying in the next year, while an 85-year old female has a 7.6 percent likelihood of death.

Using the SSA actuarial tables, I estimate the probability of death in the next year for each of the 197 billionaires in question.[2] I find that the average billionaire in this group has a 3.6 percent chance of dying in the upcoming year. In other words, we should expect that only about seven estates would be subject to Clinton’s proposed billionaires’ tax in the first year of its enactment (or 3.6 percent × 197).

How Much Revenue Would the Tax Raise?

With all of the assumptions laid out above, we can estimate how much Clinton’s billionaires’ tax would be likely to raise in the first year after its enactment.

First, we can estimate how large each billionaire’s taxable estate would be, by taking their Forbes net worth, multiplying by 50 percent (how much wealth would be reported to the IRS), and multiplying that figure by 30.7 percent (what portion of the reported estates would be taxable). Then, we multiply the portion of the estate over $500 million by 10 percent, to determine how much each billionaire would owe in Clinton’s billionaires’ tax, in the event of death.[3]

From there, we can take an average of the tax liability of each billionaire, weighted by each individual’s probability of death, to calculate the total expected revenue from Clinton’s billionaire’s tax. All in all, I estimate that the tax is expected to raise $600 million in the first year after enactment.

For context, this is a drop in the bucket. The federal government raises more than $3 trillion in revenue each year; $600 million is a rounding error. Even in the context of the federal estate tax, which brings in $20 billion a year, adding a new 10 percent estate tax bracket for estates over $1 billion just wouldn’t raise that much. My estimate doesn’t even take into account the possibility that higher overall estate tax rates would lead to higher rates of estate tax evasion, or the macroeconomic effects of such a change.

All in all, Clinton’s proposed billionaires’ tax is more symbolic than anything. Throughout the campaign, Clinton has disavowed raising taxes on the middle class and embraced a set of modest tax increases on the wealthy; her latest estate tax proposals continue this approach.



[1] These 197 individuals are the billionaires on the Forbes list with $3.3 billion or more in net worth. I assume that an individual with $3.2 billion in net worth, according to Forbes, would only report $1.6 billion of it to the IRS, out of which only 30.7 percent would be taxable, leading to a taxable estate of just under $500 million.

[2] Because wealthy Americans have longer lifespans than poor Americans, the SSA estimates are likely to overstate the number of billionaires that are expected to die over the next year, and thus the overall expected revenue from Clinton’s billionaires’ tax.

[3] For simplicity, I assume that all of the billionaires in question would be taxed as singles.


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