Estate taxes is key to decrease inequality and exacerbates government deficits.

The House is scheduled to consider a bill this week to repeal the federal estate tax on inherited wealth, several weeks after approving a budget plan calling for $5 trillion in program cuts disproportionately affecting low- and moderate-income Americans.[1] Repealing the estate tax would be highly misguided — especially in the context of the House budget, which would repeal health reform and cut Medicaid deeply, causing tens of millions of Americans to become uninsured or underinsured; cut the Supplemental Nutrition Assistance program (SNAP, formerly known as food stamps), making it harder for millions of low-income families to put food on the table; and cut Pell Grants, raising the financial hurdle for people of modest means to attend college. (See Figure 1.)

Despite these and hundreds of billions of dollars in additional cuts that were largely unspecified, the House budget included no revenue increases. And while concerns of future deficits supposedly drive the budget’s harsh cuts, repealing the estate tax would significantly expand deficits.

Repeal would:

Cost $269 billion in reduced revenues over 2016 to 2025, according to the Joint Committee on Taxation (JCT), adding $320 billion to deficits when counting additional interest on the national debt. The legislation before the House would not offset this cost, contrary to Republican calls for a balanced budget.

Do nothing for 99.8 percent of estates. Only the estates of the wealthiest 0.2 percent of Americans — roughly 2 out of every 1,000 people who die — owe any estate tax. This is because of the tax’s high exemption amount, which has jumped from $650,000 in 2001 to $5.43 million per person (effectively $10.86 million for a couple) in 2015. Repeal would bestow a tax windfall averaging over $3 million apiece, or more than a typical college graduate earns in a lifetime, on the roughly 5,400 wealthy estates that will owe the tax in 2016.[2] The 318 estates worth at least $50 million (some of which are worth hundreds of millions of dollars) would receive tax windfalls averaging more than $20 million each.

Exacerbate wealth inequality, which has grown significantly in recent decades. In 2012, the wealthiest 1 percent of American families held about 42 percent of total wealth, new data show.[3] Large inheritances play a significant role in the concentration of wealth; inheritances account for about 40 percent of all household wealth and are extremely concentrated at the top. Repealing the estate tax would exacerbate wealth inequality by benefiting only the heirs of the country’s wealthiest estates, who also tend to have very high incomes.[4]

In addition, despite policymakers’ frequent statements about the importance of work, repeal would reduce the incentive for heirs of large estates to work.

Evidence shows the estate tax is an economically sound tax. Contrary to claims that it hurts the economy, it likely has little or no impact on wealthy donors’ savings, and it encourages heirs to work. It is an economically efficient way to raise revenue that supports public services and lowers deficits without imposing burdens on low- and middle-income Americans. Thus, the estate tax plays an important role in our revenue system, particularly given our long-term budget challenges.

Tax Affects Only Largest Estates

Only the estates of the wealthiest 0.2 percent of Americans — roughly 2 out of every 1,000 people who die — owe any estate tax (see Figure 2). This is because estate taxes are due only on the portion of an estate’s value that exceeds the exemption level, $5.43 million per person in 2015.

Moreover, the few estates that owe the tax generally pay less than one-sixth of their value in tax. Among taxable estates in 2013, their “effective” tax rate — that is, the percentage of the estate’s value that was paid in taxes — averaged 16.6 percent (see Figure 3).[5] The effective rate is far below the top statutory rate of 40 percent, both because of the high exemption level and because heirs can often shield a large portion of an estate’s remaining value from taxation through various deductions.

Only roughly 20 small business and farm estates nationwide owed any estate tax in 2013, the Tax Policy Center (TPC) estimates. They owed just 4.9 percent of their value in tax, on average.[6]