Tax inequality is harmful for economy, workforce
Published 9:52 am Thursday, June 5, 2014
By Jennifer Vogt-Erickson
The estate tax is one of the most progressive taxes around, so it’s curious to me that it’s one of the least popular. Unless a person stands to inherit a lot of money, it won’t apply to him or her. Ever. Perhaps if the estate tax were nicknamed the Rockefeller Tax or Vanderbilt Tax, it would get the support it deserves. People would see it for what it is — a tax on wealth that only a small fraction of estates have any liability whatsoever to pay.
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Even in Minnesota, which levies estate taxes at the $1 million level—substantially lower than the $5 million mark where federal estate taxes kick in — only 3 percent of estates owe any tax at all. Of that small percentage, only 3 percent pay at the federal level too. We’re not talking average Joe’s and Jane’s here. They don’t need those who are trying hard to make ends meet to rally around them; they’ll be able to take care of themselves. The tax is projected to bring in about $170 million to the state’s coffers this year — money that won’t have be raised through income or sales taxes.
In a country with rising inequality, the estate tax is a relatively painless way to restore a little fairness to the playing field. It is a limit on the concentration of wealth, and it gives government the ability to collect unrealized capital gains taxes from held assets that have appreciated over time.
In a study from 2001, more than half the value of estates worth at least $5 million was from unrealized capital gains. If people had sold those assets in the years before their deaths, they would have had to pay income tax on them. Thus, if there were no estate tax, holding on to assets would be an easy way to avoid taxation on the appreciated value of investments.
The fate of farm and small business estates is often a rationalization for reducing estate taxes or abolishing them entirely. I have a personal concern in this because my parents own a medium-sized farm. I have yet to hear of somebody selling a farm for lack of liquidity to pay estate taxes. This is probably why:
1. In Minnesota, since 2011, there is a $4 million deduction for farm assets in addition to the $1 million exclusion ($5 million total).
2. Any farm estates that owe taxes (about 50 statewide between April 2012 and August 2013) can defer the taxes for five years and spread payments over a period of up to 15 years with a low rate of interest.
3. Land can be valued based on agricultural use, not on what the land could be worth for other purposes (such as planting subdivisions instead of corn).
4. Estate planning helps smooth intergenerational transfers. Farmland values have about doubled in southern Minnesota since 2009, so even average-sized farms should do estate planning.
Conservatives may condemn pointing out these facts as the “politics of envy.” That’s clever attention-shifting rhetoric. I ascribe to the “politics of enough.” I’m more concerned about the tens of millions of people scraping by than the far fewer number of super wealthy people in this country. I’m doing okay myself, but I associate with people on shaky financial ground every day. They are my friends and neighbors.
It’s not some kind of mystery where this inequality comes from. We made the taxation system more regressive — the estate tax being one small part — so the rich pay a smaller share of their income and wealth than they used to. Public investments in education have fallen off and it’s harder to afford college. At the same time, jobs in high-tech areas go unfilled for lack of trained workers, which lowers output.
The minimum wage flat-lined for far too long, and we weakened unions. Wages haven’t kept up, so people can’t buy as much. Due to lack of demand, capital is sitting idle. Trickle-down economics has been a sham: inequality produces inefficiency and drags our whole economy down. Aside from the uber-rich, we’re all worse off.
Democrats and Republicans alike are to blame for this — Republicans leading the charge and Democrats either going along, standing by, or giving up too easily. It doesn’t have to be like this.
Think of it this way — we’re in a game, and there is no expectation that everybody will win. But we want to know what the rules are, have them apply the same to everybody, and have them be enforced fairly so we have a fighting chance in this life.
The referee in this game is the government. Right now the referee is brazenly biased toward those who pay big money to campaigns and lobbyists. The answer to this problem is not to sideline the referee or shrink its role. The answer is to hold the referee accountable to all of us.