Americans hate the estate tax but love the
wealth tax. What’s up with that?
Both focus their burden on the nation’s most
fortunate few. Both promise to dismantle large fortunes, or at least slow their
growth significantly. And both could generate much-needed tax revenue — revenue
that might be spent on things that people really care about, like
infrastructure, healthcare, and education. So why is one tax reviled and the
other beloved?
Part of the answer can be found in the adage
that familiarity breeds contempt. The estate tax is old, and like many old
things, it’s had a long time to make enemies. The wealth tax, by contrast, is
new and untested. Unsullied by experience, it remains appealing in theory.
But champions of a new wealth tax can learn
something from the history of estate taxes: If you promise to create a narrow
tax targeting only the very rich, make sure you keep it a narrow tax targeting
only the very rich.
Problematic
Polling
Before diving into the estate tax/wealth tax
puzzle, let’s pause for a second to acknowledge that wealth tax polling isn't
everything it’s cracked up to be.
Consider a widely cited NPR/PBS NewsHour/Marist survey from July.
Pollsters asked respondents if they supported “a Wealth Tax, that is a higher
tax rate on income above one million dollars.” Fully 62 percent said yes, while
just 34 percent said no. Impressive!
Or it would be, if the pollsters had actually
asked a question about wealth taxes. Instead, they asked about higher income tax
rates. While higher rates on income over $1 million would definitely irritate
wealthy people, that doesn’t make them a “wealth tax” as the term is generally
understood.
Indeed, the Marist definition of a wealth tax
doesn’t describe either of the high-profile wealth taxes from Democratic
presidential candidates that are getting national attention: Massachusetts Sen.
Elizabeth Warren’s “ultra-millionaire tax” and Vermont Sen.
Bernie Sanders’s “tax on extreme wealth.”
Both Warren and Sanders have proposed net
worth taxes, which is how wealth taxes are usually defined. (For a great
introduction to net worth taxes, see Greg Leiserson’s piece for the
Washington Center for Equitable Growth.)
Still
Popular
Subpar poll questions notwithstanding, the
wealth tax seems legitimately popular, even when correctly defined.
In a Quinnipiac University poll conducted
in April, 60 percent of respondents endorsed the idea of a wealth tax, defined
as a 2 percent annual tax on “wealth over $50 million”; 34 percent opposed the
idea. A February poll by CNN asking
about a similar tax found 54 percent in favor and 39 percent opposed. Another
February poll, this one by Morning Consult,
found support for Warren’s wealth tax running at 61 percent.
These are big and remarkably consistent
numbers. It’s fair to say that, at least as taxes go, the wealth tax is
genuinely popular.
By contrast, the estate tax tends to struggle
in most opinion surveys. It’s difficult to find recent polls probing estate tax
opinion, probably because debate over this levy died down after it was gutted
in 2017. But several surveys from that year are still revealing:
·
A November 2017 Quinnipiac survey found
48 percent of respondents in support of estate tax repeal; 43 percent
opposed the idea.
·
A Quinnipiac survey from May 2017 found
identical results: 48 percent to 43 percent in favor of repeal.
·
Another survey from
May 2017, this one by TIPP/Investor's
Business Daily, found that 35 percent of respondents supported
repeal “strongly,” while 20 percent supported it “somewhat.” By contrast, 21
percent opposed repeal “strongly,” and 18 percent “somewhat.”
Those poll numbers are broadly consistent with
even older surveys, which generally found tepid support for
taxing estates.
Indeed, what’s most striking about the
long-run history of estate tax polling is the rarity of questions that even
broach the topic. That neglect by pollsters mirrored similar neglect by
policymakers.
For decades, American politicians took the
estate tax for granted. There was plenty of tax debate over the course of the
20th century to be sure, but almost all of it was about the income tax. By contrast,
the estate tax was uncontroversial.
The estate tax was also largely untended,
especially in the years after World War II. In 1942 lawmakers established an
exemption of $60,000 — an estate just shy of $1 million in today’s dollars. And
then lawmakers walked away. The exemption remained unchanged for 34 years — an
eternity in tax policymaking.
A lot of things changed between 1942 and 1976,
not least the value of $60,000. By the time lawmakers increased the estate tax
exemption in 1976, that $60,000 exemption was worth about a quarter of what it
had been in 1942.
To be sure, the estate tax was still a
high-class sort of problem in 1976. But it was becoming an issue for the merely
rich, rather than just the very rich or the extremely rich. From a political
perspective, that was important — and hard to undo.
Beginning in 1977, lawmakers began pushing the
estate tax exemption upward. But motivated opponents of the tax — most of them
drawn from the ranks of the very and extremely rich — were skilled at exploiting
the long-run erosion of the exemption. By the time lawmakers started to raise
it, the levy’s political foundation was already badly damaged. That made it
easier to undermine the estate tax on broader grounds, including specious
arguments about “double taxation” and the ostensible threat it posed to small
businesses and family farms.
Ultimately, estate tax foes were able to gut
the tax. It was actually repealed in 2001, only to be rescued from its own
grave 10 years later.
The revivified estate tax, as it exists today,
features an exemption that keeps it narrowly confined to the uppermost strata
of American society. In recent years, about 99.94 percent of estates have been
wholly exempt, thanks to an exemption of $11.2 million ($22.4
million for a married couple).
This means, to put things in slightly different
terms, that the top 10 percent of American income earners pay more
than 90 percent of the estate tax; almost 40 percent is paid by the richest 0.1
percent.
The exemption hikes have returned the estate
tax to its traditional role as a problem for plutocrats. But those hikes don’t
seem to have made the tax more popular; although there isn’t much recent
polling, the exemption hikes before 2017 didn’t improve the tax’s
reputation, so it seems unlikely that things have changed much since.
Meanwhile, however, those exemption hikes have
done a good job of eviscerating the tax as a revenue tool. It currently
raises less than 1 percent of total federal revenue.
Lessons
for the Wealth Tax
The battle for the estate tax was lost a long
time before lawmakers started raising the exemption in 1976. Turns out that if
you neglect a tax for decades, it will fall apart — politically, if not
economically or legally.
There’s a lesson here for champions of the
wealth tax. Keep a laser focus on what makes the tax popular in prospect: its
impact on the nation’s largest fortunes. Don’t succumb to the temptation to
broaden it, even if that broadening seems justified by revenue needs.
Current Democratic candidates for the
presidency have a lot of new spending in mind for the country. It will be
tempting to think about broadening the wealth tax beyond the ranks of the
super-rich, perhaps even to the rest of the top 1 percent.
Some broadening might go unnoticed. But it
might also start quickly to unravel the general support a wealth tax now
enjoys.
Reasonable people can disagree about the
wisdom of taxing the rich with new levies on net wealth. But one thing is
clear: If you start out by promising to tax extreme wealth (as Sanders likes to
call large fortunes), then keep your focus narrow.
And don’t forget to adjust things for
inflation.
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