To Make The US More Equitable, Congress Should Do The Obvious
The Estate Tax threshold is absurd, simple to fix, and has a major impact on generational wealth inequality.
“Surely, an unknown gambler’s hand shakes the cup, casts you out, and out there you count upon landing either for a lot or very little. But after the die has been cast, you are put back into the cup and there, inside, in the cup, no matter how you come to lie, you signify all of its numbers, all of its sides. And there, inside the cup, luck or misfortune are of no concern, but only bare existence.” — Rainer Maria Rilke
Background — Equity and the Estate Tax
First, equity- what is it and why do we care? It is basically the theory, so central to America’s social contract, of Equality of Opportunity. We accept unequal outcomes as long as the starting point is the same. We don’t choose or earn the place in life that we are born into, but what we make of opportunities over the course of our lives is something we can at least influence. We care about equity mostly because of the visceral feeling of injustice we get when it is missing. Somewhere deep within, we know that, as Rilke puts it, we’re all the same in the cup.
The estate tax is money that the government takes when you die and your wealth is passed onto your heirs. My husband is an estate planner, so I have gained a lot of residual knowledge in recent years. The fact that I always balk at is the tax threshold. In the US, you are not taxed anything at the federal level for the first $11.58 million per person (~$23M for a married couple). It then proceeds on a graduated scale from 18 to 40%, with some differences by state.
Absurd
Median family net wealth according to the Survey of Consumer Finances (SCF), a triannual study produced by the Federal Reserve, was ~$97,000 for the average US household in 2016. (It seems there should be a more recent report but I can’t find it. Other estimates also vary). Still, using the Federal Reserve’s numbers and the $23M threshold for a couple, to compare apples and apples, the estate tax threshold is 238 times the median family net worth and over 1000 times the median net worth for Black and Latino households.
It would make a lot more sense for people who are in, say, the lowest quartile of wealth to not have to pay tax, similar to subsidies for education or insurance if your income is below a certain level. However, wealth distribution is very uneven, so it turns out that the bottom quartile of wealth is negative. So what if we just said $100K, or 1 times the median? Or even $500K, for 5 times the median? Certainly not 238 times the median!
Straightforward to Fix
Changing the threshold is simple for Congress to do — no complicated retributions or infringing on state’s rights. The revenue collected can be put to use towards public goods and services that promote equality of opportunity, such as education (especially early childhood) or clean air and water. Philosophically, too, people understand that “you can’t take it with you,” so it is relatively straightforward to communicate.
Impactful
People will find ways around the lower threshold, no doubt. Still though, some of these tax avoidance strategies are likely more socially preferable than the status quo. For example, the current rules allow for you to gift up to $15,000 per recipient per year tax-free. Perhaps a lower threshold would inspire people with wealth to spread it more broadly among their relationships than just immediate heirs, during their lifetimes.
In time, perhaps the lowered threshold would also change our anchored perception of wealth and inspire us to hoard less. Consider the analogy that the money supply of a country is like its blood supply. Our societal organism has persistent coagulation in some areas and a near complete lack of supply to others. Better circulation is in all of our interests, as well as some clotting where the wounds are (i.e., putting resources toward lifting up marginalized groups).
It’s been nice to see the outpouring of individual contributions to organizations that fight racial injustice and toward black-owned-businesses over the past few weeks. Changing the estate tax threshold would be a small but impactful step in the right direction on a public, structural level.
