Weakening the Estate Tax Is a Bad Idea – So Is Repealing It

The Senate-passed tax bill would double the value of estates that’s exempt from the estate tax, from $11 million per couple ($5.5 million per person) to $22 million per couple ($11 million per person). And, as explained below, Senate Finance Committee Republican Charles Grassley recently used an ill-advised argument to call for repealing the tax entirely. Here’s why both weakening and repealing the tax are bad ideas.

• Only extraordinarily wealthy estates face the tax — and the share has fallen deeply in recent decades, in every state. Even today, only the largest 2 in 1,000 estates (0.2 percent) face the tax. Policymakers have dramatically raised the exemption level in recent decades (from $675,000 per person in 2001), so far fewer estates are large enough to be taxable. See the state-by-state figures below, based on IRS data.

• Raising the exemption level to $22 million per couple would only benefit the heirs of those largest 2 in 1,000 estates. The heirs of all currently taxable estates would get a tax cut:
  • Doubling the exemption would eliminate the estate tax for estates worth between $11 million and $22 million per couple, reducing the number of estates facing the tax to just 1,800 nationwide — fewer than the largest 1 in 1,000 estates.
  • It would also give estates worth over $22 million per couple (all those left facing the tax) a tax cut of $4.4 million apiece. To put that tax cut in perspective, it’s about the same as the cost of Pell Grants to help 1,100 low- and moderate-income students afford college.

Doubling the estate tax exemption until the end of 2025 (as the Senate-passed bill would do) would cost $83 billion over ten years – more than the cost of a proposal from Senate Republicans Marco Rubio and Mike Lee that would expand the Child Tax Credit and help 26 million children in low-income working families.

• Grassley used a baseless argument to promote repeal. “I think not having the estate tax recognizes the people that are investing” Senator Grassley said, “as opposed to those that are just spending every darn penny they have, whether it’s on booze or women or movies.” Even ignoring the senator’s insulting characterization of the more than 99 percent of families who don’t owe the estate tax because they have less than $22 million in wealth, the idea that the estate tax encourages or rewards investment is unsound. As we’ve explained:
  • The estate tax doesn’t significantly affect wealthy people’s decisions over how much to work and save, a large body of research finds. Thus, it likely has little or no effect on overall private saving. But the estate tax has a positive impact on overall national saving (private plus public saving) because, by raising revenues, it reduces budget deficits and, thus, boosts public saving.
  • The estate tax encourages recipients of massive inheritances to work and save by reducing the inheritance they can live off, research also finds. Treasury Department analyst David Joulfaian estimates that “an inheritance of $1 million, other things equal, reduces labor force participation by about 11 percent.” Repealing the estate tax would reduce work incentives for heirs.

A number of Senate Republicans, including Senate Finance Committee Chairman Orrin Hatch, Susan Collins, Mike Rounds, and Jeff Flake, have said that repealing the estate tax — as the House-passed tax bill would eventually do — isn’t a high priority. They’re right, especially given the nation’s growing fiscal challenges and wealth inequality. But neither is giving heirs of the wealthiest estates a huge tax cut by doubling the estate tax exemption.