Thursday, October 31, 2019

Why Do People Hate Estate Taxes But Love Wealth Taxes?


Joseph Thorndike Contributor Oct 30, 2019, 10:27am
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:
·         November 2017 Quinnipiac survey found 48 percent of respondents in support of estate tax repeal; 43 percent opposed the idea.
·         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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