Conservatives hate the estate tax, which falls primarily on a tiny sliver of the very wealthiest households. However, criticisms of the estate tax do not hold up well under close scrutiny. We examined the criticism that the estate tax constitutes “double taxation” in the preceding article in this series. Estate tax foes raise other spurious arguments, examined below.
Critics contend that the estate tax reduces the incentive to work by restricting the ability to pass acquired wealth on to the next generation. The notion that people in their thirties and forties—in their prime earning years—will work less on the supposition that some portion of their estate will be taxed forty or fifty years in the future is a bit silly. An investor from Japan—where estate taxes are much higher than in the U.S.—noted in a recent Economist article that “No one at the start of their career is thinking about [the estate] tax.”
Contrary to right wing assertions, research suggests that the absence of the estate tax—more so than its presence—disincentivizes work. A National Bureau of Economic Research (NBER) working paper concludes that the likelihood of a person dropping out of the labor force increases as the size of their inheritance increases. Thus, the estate tax would encourage work by reducing the size of windfall inheritances. Winston Churchill observed that the estate tax is, “a certain corrective against the development of a race of idle rich.” As one millionaire estate tax proponent said less artfully, “Leveling the playing field with the estate tax enables the most capable to succeed, instead of the losers who dope with Daddy’s money.”
Critics also argue that the “death tax” prevents farms and businesses from being passed from one generation to the next. Note that—even prior to the estate tax reductions enacted in 2017—the first $5 million of estates consisting primarily of farm and small business value has been exempt from Minnesota’s estate tax. Instances in which either the state or federal estate tax prevented the intergenerational transfer of a farm or business are not just rare, but almost unheard of. For example, in 2001, when estate taxes were much higher than they are today, the New York Times reported that the American Farm Bureau Federation (a staunch opponent of estate taxes) could not identify a single case of a family farm lost due to the estate tax.
Finally, estate tax opponents claim that the tax encourages super-wealthy households to flee a state, which undermines the goal of revenue enhancement. The first part of this argument—that some households will relocate to avoid the estate tax—has some merit; but, estate tax opponents both exaggerate the extent to which such relocations are driven by taxes, and also understate the extent to which they are due to other factors, such as weather. The evidence does not support the second part of the argument, that this flight will offset the revenue generated by the tax. A NBER paper studied the impact of state estate tax laws upon the migration patterns of U.S. seniors. That paper found that among states that cut their estate tax, the additional revenue gained from a small in-migration of rich seniors did not offset the loss of revenue resulting from the lower estate tax. A literature review conducted by the Minnesota Department of Revenue (MDOR) reached a similar conclusion.
Contrary to the magical thinking of supply-siders, reductions to the estate tax lead to less—not more—state revenue. As the estate tax is cut, other more regressive taxes must pick up the slack. While the one percent of Minnesota households with the highest income received 16.2 percent of statewide income in 2014, they paid just 15.0 percent of state and local taxes, excluding the estate tax, based on MDOR’s 2017 Minnesota Tax Incidence Study. The same one percent, however, paid 94.3 percent of the state estate tax.
Minnesota’s progressive estate tax offsets much of the regressivity in the rest of the state and local tax system; it requires high income households to pay taxes in a proportion closer to their share of statewide income. Without the estate tax, a larger share of Minnesota state and local taxes would be borne by the low- and moderate-income households with the least ability to pay.
Seven years ago, Bill Gates Sr. laid down a powerful moral rationale for the estate tax.
…we must acknowledge that the person who accumulates wealth in this country was not able to do that independently. The simple fact of living in America, a country with stable markets and unparalleled opportunity fueled in part by government investment in technology and research (something my family has plenty of firsthand experience of), provide an irreplaceable foundation for success and have created a society which makes it possible for some men, women and their children to live an elegant life… So I believe that those of us who have benefited so greatly from our country’s investment in our lives should be asked to give a portion of our wealth back to invest in opportunities for the future. Society has a just claim on our fortunes and that claim goes by the name estate tax.
Income and wealth inequality has accelerated in recent decades. Wages for working people have stagnated. The share of total wealth concentrated in the hands of a small few has grown more extreme. Such inequality undermines the purchasing power of the vast swath of lower- and middle-income families, which reduces demand for goods and services and limits the potential for job growth and economic expansion.
A robust estate tax by itself will not reverse the tide of mounting inequality. However, taxes of huge intergenerational transfers can partially address the most egregious cases of wealth concentration. This revenue funds public services that benefit us all, and reduces taxes for working families.