How the Rich Pay Less Inheritance Taxes
Donald Trump and Hillary Clinton have opposing plans for the country’s estate tax: Clinton wants to raise it and Trump wants to kill it.
Yet behind the political noise, which intensified on Thursday when Clinton detailed her tax proposal, her contribution to revenue has declined over the years. Therefore, any change in policy is likely to have minimal impact on tax revenue.
According to the IRS, estate taxes generated $16.4 billion in 2014, the latest year available. That’s about a third less than in 2006, when collections were $24.6 billion.
Revenues have fallen even more dramatically when looking further afield. In 1976, nearly 8% of all deaths resulted in inheritance tax. In 2011, the last year analyzed, this number was only 0.13%.
Estate tax is now less than 1% of federal revenue, according to the nonpartisan Tax Foundation. This decline is surprising given the growing number of millionaires and billionaires over the past two decades, and the trillions of dollars that are supposed to be passed on to the next generation.
The main reason for the decline is a higher number of exemptions. In 1976, estates had to pay tax on a value over $60,000. Today, the threshold is $5.5 million for individual estates, which means anyone who leaves their heirs less than that amount is excluded.
The top tax rate has also fallen, from 70% in 1981 to 55% in 2000 and 40% today.
Another reason the inheritance tax is quietly dying is that the wealthy have gotten better at avoiding it. A wide range of trusts and estate planning tools have made it easier for wealthy families to pass on assets tax-free.
A popular tool they use is the grantor-retained annuity trust, which has helped several billionaires pass on assets without gift or estate tax.
“People are using every legal machine they can use to get as much out of their estate as possible,” said Roberton Williams of the Independent Tax Policy Center.
Trump called for the removal of the tax.
Clinton’s plan would likely increase the revenue generated by the tax, by increasing the rate for the top brackets: it would impose a 50% rate on estates worth more than $10 million per person; a 55% rate on those over $50 million per person and a 65% rate that would apply to individual estates over $500 million, or over $1 billion for couples married.
Yet none of these plans are likely to impact the wealthy or federal tax revenues, since many of the top payers are already working around tax.
“At this point, it’s very symbolic,” Williams said. “Twenty billion dollars isn’t big change. But it doesn’t really change the needle when it comes to the federal budget.”