What impact would repealing the estate tax have on the distribution of wealth? On the face of it, there should be no doubt that wealth would become more concentrated. Fewer than 2 percent of estates pay any tax at all; and as of 1997, half of the total taxes paid came from estates valued at more than $5 million.
Nonetheless, some conservatives say that the estate tax is a failure because it has not spread wealth more equally. "Wealth is probably more unequally distributed in the United States than in countries with no estate tax," Bruce Bartlett of the libertarian National Center for Policy Analysis wrote last fall in The Public Interest. His conclusion: Since the estate tax is ineffective, we should get rid of it.
The distribution of wealth is less equitable in the United States than in the four countries without an estate tax that Bartlett mentions: Canada, Israel, Australia, and New Zealand. In 1998 the richest 20 percent of Americans owned almost 85 percent of all household wealth (compared to about 70 percent in Canada). Yet it is still possible that the estate tax has moderated the trend toward greater concentration of wealth in the United States.
During the 1990s, as the stock market soared, U.S. stockholders saw the value of their assets increase. Of the wealth generated in the 1990s from the near tripling of the (inflation-adjusted) Standard & Poor's 500, 33 percent accrued to the wealthiest 1 percent of households, while 52 percent of Americans owned no stocks at all. A majority of the middle class has all of its savings tied up in a family home; at the furthest extreme, nearly a fifth of all households in 1998 had no accumulated wealth or were in debt.
This explosion of wealth at the top came at a point when Congress had already weakened the redistributive bite of the estate tax. During the mid-1990s, legislators began slashing the tax rate for the top bracket from 77 percent--a level that had been in place for more than 30 years--to the current rate of 55 percent (a surtax raises the rate to 60 percent for estates over the $10-million mark). In addition, the exclusion, or cutoff below which the tax does not apply, has risen from $259,000 in the late 1970s to nearly $700,000 today, in constant 1990 dollars.
What if, instead of eroding, the estate tax had remained as progressive as it was in the mid-1970s? It is impossible to go back in time and tinker with the tax code, but using a simulation model, I have been able to recreate some hypothetical scenarios to explore the effectiveness of the estate tax in shaping the distribution of wealth.
Suppose, if all other factors were constant, the tax cutoff had stayed at $250,000 in 1980 and had been adjusted upward only for inflation. In this alternative history, the richest 1 percent of households would have held just 30 percent of the wealth in 1983 and 32 percent in 1998, rather than 35 percent of the wealth in 1983 and 38 percent in 1998. The share of wealth held by the middle class (those households between the 20th and 60th percentiles in the distribution) would have increased nearly 10 percent. Even in this hypothetical world, there would have been considerable inequality in wealth ownership: Families in the bottom fifth would have accumulated almost no wealth. Yet wealth would have been spread far more equally than it is today.
In another alternative scenario, I tested what would have happened if the estate tax had become even less progressive and the cutoff were increased $200,000 each year, starting in 1980. In 1980, for example, the true cutoff was $170,000, and I experimentally increased it to $370,000. The result: an increase in holdings by the richest. In 1983 the top 1 percent would have owned 37 percent of the nation's total wealth; and by 1998 their share would have grown to 43 percent. Perhaps more striking, however, is the increase in the wealth of the top 20 percent, who would have owned 88 percent of all wealth in 1983 and more than 90 percent by 1998.
Back in the real world, President Bush and the House of Representatives have called for eliminating the estate tax by 2008. Some observers speculate that because of opposition to repeal in the Senate, the president may settle for an increase in the current exemption, perhaps to $5 million. As the simulations of much more modest changes in policy indicate, even this compromise would have dramatic, long-term consequences for American society by concentrating wealth at the top.