There are legitimate debates over what tax rates should be, even if many of us consider the current tax rates on the rich and super-rich far too low. However, there really is not a legitimate debate on whether the rich should have to pay the taxes they owe.
Unfortunately, our politics is such that it is now a partisan matter as to whether rich people should have to pay the taxes they owe. This comes up in many contexts, but perhaps most strikingly with the estate tax.
Just to be clear, the only people who owe any money at all under the estate tax are very rich. The current tax has a $12.06 million dollar exemption, per person. That means a couple can pass along $24.12 million to their kids without paying a dime in estate tax.
This is not a tax paid by small business owners or successful lawyers. It is a tax paid by the very rich: full stop. A successful small business owner would be extremely lucky to have accumulated $5 to $10 million in their business over their lifetime, less than half the cutoff for a couple to owe any estate tax at all.
It’s also important to remember that, like the income tax, the estate tax is a marginal tax where it is only paid on the increment above the cutoff. So, let’s suppose our “small” business owning couple has accumulated $24.2 million over their lifetime, $80,000 over the cutoff.
This means they will have to pay the 40 percent estate tax rate on the $80,000 over the cutoff, not the full $24,200,000. Their tax, in this case, would be $32,000 or 0.13 percent of the value of their estate. Can we find the world’s smallest violin?
Let’s not waste time with foolishness, the estate tax is a tax paid by a tiny number of rich people. That is who we are talking about.
Why Do Only the Non-Rich Have to Pay the Taxes They Owe?
The vast majority of people get the vast majority of their income through their wages. We don’t have much choice in paying our taxes, they are deducted directly from our paychecks. It is only the rich and the very rich that find ways to avoid or evade taxes.
As noted earlier, we can debate how much different groups should be paying in taxes. The rich have been winning this debate big time over the last sixty years. The top marginal tax rate was lowered from 90 percent in the early 1960s to just under 40.0 percent in 2022.
There is a similar story with the estate tax. In 1980, estates larger than $500,000 (in 2022 dollars) were subject to the tax. There were a set of marginal estate tax rates, but the top rate paid by the largest estates was 70 percent. This meant that a person with a $1 billion estate would pay close to $700 million in taxes to the government.
In the years since 1980, the cutoff for estate tax liability was both hugely raised, and the rate was cut almost in half to 40 percent. The current $24.12 million cutoff means that even the very rich avoid paying taxes on a sizable portion of their estate. A couple with an estate of $50 million would be able to have almost half of their estate completely avoid taxes, even without playing any games.
Unfortunately, the very rich are still not satisfied with this situation. They would prefer not to pay any taxes (so would we all), and they can hire the tax lawyers and accountants to make their tax aversion a reality. The law allows rich people to create trusts for a variety of purposes. These trusts can be used to transfer wealth to descendants, without anyone ever paying estate tax on the money.
Although the rules on trusts generally have limits on the amount of wealth that can be placed in them without being subject to tax, the rich have found ways to get around these limits. These tricks have allowed some of the richest people in the country, for example Sam Walton, the founder of Walmart, to pass their fortune onto heirs, while paying minimal amounts of estate tax.
It makes no sense to allow these abuses to continue. Creating trusts or other vehicles, exclusively to avoid paying taxes is a total waste from an economic perspective. Not only are we allowing the richest people in the country to avoid paying the taxes they owe, but we are tying up resources, which could go to productive purposes, in this process. Many highly trained, and likely highly accomplished, lawyers, accountants, and their staff, spend millions of hours in this gaming.
As that great proponent of progressive taxation [sarcasm], Ronald Reagan, said when he launched his push for the 1986 tax bill, the tax code at the time “causes some to invest their money, not to make a better mousetrap but simply to avoid a tax trap.” After we have had the political battles over tax rates, there is not a political question as to whether the agreed upon tax rates should be paid. This is simply an issue of the rich wanting to steal from the rest of us.
Congress should crack down hard on the games being used by the very rich to avoid paying the estate tax. Senator Bernie Sanders has proposed legislation that would eliminate the most obvious tricks now being used. This is not just an effort by the progressive wing of the Democratic Party, people closer to the center, like Maryland Senator Chris Van Hollen, have also expressed support for curbing abuses, as has the Biden Treasury Department.
To my mind, the estate tax should be far higher. Rates of 60 or 70 percent would still allow the Elon Musks and Bill Gates’s of the country to pass on vast fortunes to their kids that will allow them to live in total luxury without working a day in their life. I also would not be troubled if the rich, say couples with $5 million in their estate, had to pay some tax, and not just the super-rich. (Remember, it is a marginal tax.)
That is a topic for future political battles. But once Congress has set the rate, there really is not an argument about whether it should actually be collected. This is simply a question of law enforcement and the super-rich stand on the other side. We need some good old-fashioned “law and order,” the super-rich have to be forced to pay the money they owe on the estate tax.
 The difference between tax avoidance and tax evasion is that avoidance is a legal method for reducing a person’s tax liability. Evasion is an illegal method. Some schemes are borderline, since their legality is not clear.
 This includes the 2.95 percent Medicare tax that high income households must pay.