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Posted by Tiffany Gaskin

Why Do People Hate Estate Tax But Love Wealth?

Why Do People Hate Estate Tax But Love Wealth?

Americans do not like the estate tax, but they love the wealth tax. What's up with this?

Both taxes focus their burden on the nation's most fortunate few. Both promise to dismantle big fortunes or at least significantly reduce their growth. And both could create the much-needed tax revenue - revenue that could be spent on things that matter to people, like infrastructure, health care, and education. So why is one tax denigrated and the other loved?

Part of the answer lies in the saying that familiarity breeds contempt. The estate tax is old, and like so many old things, it has had time to make enemies. The wealth tax, on the other hand, is new and untested. Unsullied in experience and it remains appealing in theory as ever.

But supporters of a new estate tax can learn something from the estate tax history: If you promise to create a restricted tax only for the very rich, be sure to keep it as a restricted tax only for the very rich.

Problematic Polling

Before we get to the wealth tax/estate tax issue, let's take a second to recognize that wealth tax polling is not as it is projected to be.

Consider the NPR/PBS NewsHour/Marist poll. The researchers asked respondents if they were in support of "a wealth tax, which is an income tax rate of over $1 million." Sixty-two percent said yes, while only thirty-four percent said no. Remarkable!

Or it would be if the researchers had asked a question about wealth taxes. Instead, they demanded higher tax rates. While higher income taxes of over $1 million certainly irritate the wealthy, that doesn't mean it's a "wealth tax," as the term is commonly understood.

Still Popular

Despite the questions being a bit subpar, estate tax seems legitimately popular, even when properly defined.

In a poll from Quinnipiac University, 60% of those polled supported the idea of a wealth tax, defined as a 2% annual wealth tax of "over $50 million." 34% opposed the idea. A CNN poll of similar charges found 54% for and 39% against. Another poll from Morning Consult found support for Warren's property tax at 61%.

These are large numbers and remarkably consistent. It's fair to say that, at least when it comes to taxes, wealth tax is very popular.

In contrast, estate tax tends to be an issue in most opinion polls. It's hard to find recent polls to support the estate tax perspective, possibly because the estate tax debate died after it was destroyed in 2017. But several polls still revealed:

  • A Quinnipiac survey in November 2017 revealed that 48% of respondents favor repealing the estate tax; 43% opposed the idea.

  • A Quinnipiac poll from May 2017 found identical results: 48% to 43% in favor of repeal.

  • Another survey in May 2017, conducted by TIPP/Investor's Business Daily, found that 35% of respondents were "strongly" in favor of the repeal, while 20% supported it "strongly." On the contrary, 21% were "strongly" against the repeal and 18% "somewhat."

These survey figures generally dovetail with those from even older surveys, which have generally found weak support for estate taxation.

Indeed, what surprises most in the long history of research in estate taxation is the rarity of questions on this subject. This neglect on the part of researchers mirrored similar neglect on the part of lawmakers.

For decades, American politicians have taken estate taxes for granted. Of course, there was a lot of tax debate throughout the 20th century, but most of it was about income tax. On the contrary, the estate tax is not controversial.

The estate tax was also largely neglected, especially in the post-war years. In 1942, the legislature set an exemption of $60,000, the equity capital of nearly $1 million today. And then the parliamentarians left. The exemption has remained unchanged for 34 years, an eternity in tax policy.

Much changed between 1942 and 1976, not least the value of $60,000. By the time the lawmakers increased the estate tax exemption in 1976, the initial $60,000 exemption was worth almost a quarter of what it was in 1942.

True, the estate tax was still a problem for the upper classes in 1976. But it was becoming a problem for the simple rich, not just the very rich or the extremely rich. From a political viewpoint, it was important and difficult to undo.

From 1977, lawmakers began to increase the estate tax exemption. But motivated tax opponents - most of them very wealthy and extremely wealthy - have been able to profit from the lasting erosion of the exemption. When lawmakers started increasing it, the tax basis was already badly affected. This made it easier to undermine estate taxes for broader reasons, including misleading arguments about "double taxation" and the apparent threat it poses to small businesses and family farms.

Eventually, those who opposed estate tax succeeded in eliminating the tax. In fact, it was repealed in 2001, only to be brought to life ten years later.

As it is today, the renewed estate tax enjoys an exemption that limits it to the upper echelons of American society. In recent years, around 99.94% of properties have been fully exempt due to an exemption of $11.2 million ($22.4 million for a couple).

To put it another way, this means that the richest 10% of Americans pay more than 90% in estate tax; the richest 0.1% pays almost 40%.

The increase in exemptions has reduced the estate tax to its traditional role as a problem for plutocrats. But these increases do not seem to have made the tax more popular; while there isn't much recent research, increases in exemptions before 2017 did not improve the reputation of the tax, so it seems unlikely that much has changed since then.

In the meantime, however, these increases in exemptions have made it possible to eliminate tax as an instrument of income. It currently collects less than 1% of total federal revenues.

Lessons for the wealth tax

The battle for estate taxes was lost long before parliamentarians started increasing the exemption in 1976. It turns out that if a tax is neglected for decades, it will collapse politically, if not economically or legally.

Here is a lesson for real estate tax lawyers. Focus on what makes the tax popular in the future: its impact on the country's greatest assets. Do not give in to the temptation to expand, even if the expansion seems justified by the need for income.

The current president is planning a lot of new spending for the country. It will be tempting to consider extending the estate tax beyond the super-rich or even the rest of the top 1%.

Some extensions may go unnoticed. But general support, which now benefits from a wealth tax, could also start to decline rapidly.

Reasonable people may disagree on the wisdom of taxing the rich with new capital taxes. But one thing is clear: if you start by promising to tax extreme wealth, then stay focused on it.

And don't forget to adjust for inflation.



Tiffany Gaskin
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