Why We Need An Estate Tax

Defenders of the federal estate tax have pointed out ad nauseum that the tax affects only a small number of the wealthiest families. (See CTJ's analysis here, citing IRS data that shows 1.25% of estates owed tax in 2004.) But the estate tax remains quite unpopular among most Americans, largely due to effective scare tactics by the anti-estate tax lobby. A lot of people have been scared into believing they're gonna be part of that 1.25 percent.

But perhaps American voters need a more compelling reason to support the estate tax than "you won't pay it." A January 2006 report by a Federal Reserve Board researcher is a stark reminder of the real reason why the estate tax is a vital part of our tax system: the incredible (and growing) inequality of wealth in this country. The report, written by long-time FRB researcher Arthur Kennickell, estimates changes in the distribution of wealth between 1989 and 2004 and finds that:

• The wealthiest 1 percent of Americans held 33.4 of the wealth in 2004.
• This was up from 30.1 percent in 1989.
• The top 5 percent collectively held 55.5 percent of the wealth in 2004.
• The poorest 50 percent of the American population collectively held 2.5 percent of the wealth, down from 3.0 percent in 1989.
• And the very wealthiest 1 percent of Americans own a bigger piece of the pie (33.4 percent) than the poorest 90 percent put together (30.4 percent).

For particular types of property, the inequality of holdings is even greater.

• The wealthiest 1 percent of Americans owned 62.3 percent of the business assets in 2004.
• The wealthiest 5 percent collectively owned 88.7 percent of business assets.
• The wealthiest 5 percent also owned 93.7 percent of the value of bonds, 71.7 percent of the nonresidential real estate, and 79.1 percent of the value of stock.

Amidst all the fuss about who does and doesn't pay the estate tax, hardly anyone has drawn much attention to the profound inequality of wealth that makes the estate tax necessary, if only as a marginal restriction on the further growth of inequality. And part of the reason may be that this level of inequality is simply too difficult to comprehend.

A recent CTJ analysis has already highlighted the relative ineffectiveness of the estate tax in restricting the ability of the wealthiest Americans to pass on their fortunes under current law-- the analysis shows that the biggest estates paid less than 20 percent of their value in federal and state estate taxes. This new SCF data suggests that outright repeal would simply open the floodgates.