Why the Estate Tax Should Concern Us All

Daniel Mazzola, CPA, CFA
Published Date:
Oct 1, 2016

During the week of Aug. 7, presidential candidates Hillary Clinton and Donald Trump revealed their respective tax policies in major speeches to partisan audiences. While the presentations contained such jargon as marginal rates, inversions, and expenditures, the programs can be summarized as follows: Corporate America—along with the wealthy—will bear the brunt of Mrs. Clinton’s progressive agenda in the form of higher taxes, while these two groups would see their taxes reduced under a Trump regime. This is the choice Americans face in November.

The federal tax rate on income over $467,000 for a married couple is presently 39.6%. Mr. Trump would cut this top rate to 33%, while Mrs. Clinton would add a 4% surcharge for income over $5 million, leaving the top earners with a 44% tax rate. She would also try to adopt legislation that would limit the value of tax deductions and require longer periods to secure lower long-term capital gains rates, so that those making over $1 million pay at least 30%.

Estate tax is one issue on which Mr. Trump and Mrs. Clinton clearly differ on tax policy. Mr. Trump wants to eliminate the estate tax altogether, while Mrs. Clinton wants to force more families to pay—and on a higher portion of their assets, to boot.

The subject of estate tax itself does not receive that much attention; most Americans tolerate it, thinking, “The estate tax only affects the rich and they can afford to pay”. Currently, when a person dies, the first $5.45 million of the estate is exempt from federal estate taxation. For a married couple, the threshold is $10.9 million. Assets above these levels are then generally taxed at 40% before being passed on to heirs. Mrs. Clinton wants to raise this rate to 45%, lower an individual’s exemption to $3.5 million, and dispense with the rule that the amount excluded be adjusted annually to reflect inflation. (A number of tax figures are changed each year based on the average CPI for the preceding 12-month interim.) This waiver is not insignificant, as the well off could no longer assume that some of the appreciation in their net worth will be offset by higher cost-of-living expenses. Mrs. Clinton also wants to apply a 50% tax on estates greater than $10 million, 55% on estates over $50 million, and 65% on assets above $500 million. She would also end the "step-up in basis" allowance on stock valuations, engendering capital gains taxes for a wider swath of the population.

We should not be so quick to dismiss the estate tax as a burden borne strictly by the affluent. The rates and amounts precluded have been changed numerous times over the past 20 years, and it should not come as a surprise when a government that is $19 trillion in debt lowers the threshold again and again and again. Sixteen states also have their own estate taxes—some with much lower exemption levels—so those who live in those states and who would typically be considered “middle class” are not immune from an estate tax. 

For example, residents of New Jersey are exposed to a 16% tax if their estates are greater than $675,000. New York’s estate tax exemption, by way of comparison, is   $4,187,500. Thus, the estate of a homeowner in a middle-class Jersey Shore community with an adequate retirement fund would have a tax liability at his demise. To top it off, if the deceased bequeaths his home and savings to someone other than a spouse, child, or parent, that recipient will have to pay an inheritance tax. Are these the people Mrs. Clinton has in mind when preaching about the evils of income disparity and the necessity of higher taxes?  

The negative aspects of the estate tax have been detailed elsewhere but are worth noting here:  It wrongly penalizes personal attributes highly valued in America—namely, industry and thrift. It fails to generate much revenue. It can be avoided with some prudent tax planning. It is harmful to the interests of family-owned businesses and farmers. It taxes income twice.

Those who favor an estate tax assert it reduces concentrations of wealth and ensures that undeserving heirs do not profit at the expense of a fair and equitable society. But a progressive, consistent spending tax—rather than an estate tax—would be more harmful to the likes of Paris Hilton and others we are quick to demonize. Some claim that any tax breaks should go to the lower and middle classes rather than the wealthy. We as Americans would be better served by maintaining existing tax rates—or lowering them for all—and living within our means. Our economy features a large degree of mobility, and those who want to spread prosperity to the least fortunate should advocate lower government hurdles to wealth creation rather than its arbitrary redistribution. 

Numerous studies suggest that the desire to leave a legacy for one’s heirs—rather than the desire to simply enjoy a comfortable retirement—incentivizes many to continue investing in their enterprises and saving money throughout their lifetimes. All of society benefits when wealth remains invested in a productive economy, rather than being siphoned off into the coffers of bureaucratic agencies. The estate tax is another instance of the government taking money out of our hands and making us make dependent on its inclinations. Mrs. Clinton, in a speech about the estate tax, praised its revenue-raising capabilities and exclaimed, “Just think about what we can do.” Yet, as the Wall Street Journal pointed out, “The Clintons for their part have housed a fortune in their family foundation, where it can remain useful to them without being subject to tax.” If you back Mrs. Clinton and her brethren, you are willing to cede to them your decision over how your wealth is best disposed.

Do you agree with the author? Please let us know at taxstringer@nysscpa.org.



Daniel G. Mazzola, CPA, CFA, is an investment advisory representative with American Portfolios Advisors Inc. He is a Chartered Financial Analyst, Certified Public Accountant and Certified Financial Planner. Mr. Mazzola is a member of the NYSSCPA Personal Financial Planning Committee.

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