Magazine article The American Prospect

The Estate Tax as Robin Hood?

Magazine article The American Prospect

The Estate Tax as Robin Hood?

Article excerpt

What impact would repealing the estate tax have on the distribution of wealth? On the face of it, there should be no doubt that wealth would become more concentrated. Fewer than 2 percent of estates pay any tax at all; and as of 1997, half of the total taxes paid came from estates valued at more than $5 million.

Nonetheless, some conservatives say that the estate tax is a failure because it has not spread wealth more equally. "Wealth is probably more unequally distributed in the United States than in countries with no estate tax," Bruce Bartlett of the libertarian National Center for Policy Analysis wrote last fall in The Public Interest. His conclusion: Since the estate tax is ineffective, we should get rid of it.

The distribution of wealth is less equitable in the United States than in the four countries without an estate tax that Bartlett mentions: Canada, Israel, Australia, and New Zealand. In 1998 the richest 20 percent of Americans owned almost 85 percent of all household wealth (compared to about 70 percent in Canada). Yet it is still possible that the estate tax has moderated the trend toward greater concentration of wealth in the United States.

During the 1990s, as the stock market soared, U.S. stockholders saw the value of their assets increase. Of the wealth generated in the 1990s from the near tripling of the (inflation-adjusted) Standard & Poor's 600, 33 percent accrued to the wealthiest 1 percent of households, while 52 percent of Americans owned no stocks at all. A majority of the middle class has all of its savings tied up in a family home; at the furthest extreme, nearly a fifth of all households in 1998 had no accumulated wealth or were in debt.

This explosion of wealth at the top came at a point when Congress had already weakened the redistributive bite of the estate tax. During the mid-1990s, legislators began slashing the tax rate for the top bracket from 77 percent--a level that had been in place for more than 30 years--to the current rate of 55 percent (a surtax raises the rate to 60 percent for estates over the $10-million mark). In addition, the exclusion, or cutoff below which the tax does not apply, has risen from $259,000 in the late 1970s to nearly $700,000 today, in constant 1990 dollars.

What if, instead of eroding, the estate tax had remained as progressive as it was in the mid-1970s? …

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