Since the 1970s, Republicans have successfully turned the United States into an antitax country. Voters and the public are wary of any new levy, largely believe that any tax cut is by definition good, and don't trust the government to wisely spend what taxes it does collect. Nowhere has this been more successful than in the transformation of the estate tax into the so-called death tax. The estate tax now faces near certain extinction even though almost no one pays it, and very few even face the prospect of paying it.
When President Clinton left office, the estate tax rate was 55 percent and the total exemption was $675,000. With control of the White House and Congress in the wake of George W. Bush's victory, Republicans went on the offensive. As part of his 2001 tax cuts, Bush pushed for complete repeal of the estate tax, arguing, as the GOP had done for years, that it damaged family farms, double-taxed earnings, and forced the breakup of small businesses. Bush and Republicans were successful, to a point. The estate tax was phased out over 10 years, but because of budget rules, it would return in 2011 absent new legislation. From 2001 to 2009, the exemption rose to $3.5 million and the rate dropped to 45 percent. As part of a complicated compromise after the estate tax disappeared, the exemption was $5 million in 2010, 2011, and 2012, and the rate was 35 percent. After his victory in 2012, President Obama refused to allow the rate to stay at 35 percent, so the American Taxpayer Relief Act of 2012 indexed the exemption to inflation and gave the estate tax a new rate of 40 percent. It was a small, and perhaps final, victory for a progressive inheritance tax.
The exemption for 2016 is $5.45 million for an individual. It doubles for a married couple, and a surviving spouse can keep a decedent's exemption (portability). That means the only people who would pay the estate tax are multimillionaires who are either exceptionally rich or have done virtually no estate planning. In 2013, out of 2.6 million deaths, only 4,700 returns were filed showing estate tax liability. That's 0.2 percent of the population of decedents. And despite a top rate of 40 percent, the Urban-Brookings Tax Policy Center says those returns averaged an effective tax rate of about 17 percent.
Given that almost no one pays the tax, why is it so unpopular? There are a number of reasons, of which sympathy for family farms is only one. Many Americans have very aspirational (some might say unrealistic) views of what their wealth will be at the end of their lives and resent the idea that they might pay the tax, even if the chances of it are small. Some economists and policymakers oppose yet another form of double taxation in the code (the corporate income tax being the prime example). And, of course, the estate tax disproportionately affects households that are likely to include large donors to political campaigns and lobbying firms.
But maybe the main reason the tax is so unpopular is that politicians in both parties can afford to rail against it. The tax only raises about $25 billion a year, less than 1 percent of total federal revenues. Repealing it would be relatively painless, which allows lawmakers to deliver an easy win to their donors and to a public that doesn't really care about the tax.
With President Trump in the White House and Republicans again in control of both the Senate and the House, the estate tax faces near certain repeal in the next two years. For those who care about progressive taxation, this will be regrettable. But if it is coupled with a repeal of stepped-up basis (which is very likely), perhaps the end result might be a tax system that isn't really much less progressive.