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Is the Estate Tax Doomed?

- March 25, 2013

This is the question posed by political scientists Kenneth Scheve (Stanford University) and David Stasavage (New York University) in a post on the NY Times’ Opinionator blog.  They note:

With income inequality at levels not seen since the 1920s, and low economic mobility, some liberals hope that in the coming years our lawmakers will face intense political pressures to maintain, and even raise, taxes on inherited wealth. In this view, economic realities are building a compelling case for a more progressive tax system. But judging from the experience of other wealthy countries, the opposite may be true. As inequality has risen in the developed world, many governments have been dismantling — not increasing — estate taxes. Countries from Austria to Canada to Sweden have abolished estate taxes outright.

They report on their research on the history of taxation, and note that while estate taxes are very old, they originally arose because they were easy to administer, and not because they were inherently progressive. Moreover, by long-term standards estate taxes today are still relatively high. They conclude that:

We believe that the future of the federal estate tax will instead depend on its advocates’ showing that it is needed to ensure shared sacrifice of a new kind in an era of more limited wars. The same can be said for progressive taxation in general. Advocates of progressive taxation cannot assume that rising inequality will create irresistible pressure for higher taxes on inherited wealth. They will need to construct a compelling narrative of shared sacrifice, but shared sacrifice for what? Our research shows that a narrative like this cannot be constructed out of thin air. It instead requires dramatic external events providing proponents of progressive taxation with a way to recast the debate. It is always possible that economic crisis could constitute such a new event. Absent a new narrative of this sort, we expect a continued, long-run trend toward lower taxation of the rich, and as part of this, lower taxation of estates. This also implies either that federal revenues will not rise — or if they do, then new revenues will most likely come from nonprogressive sources like a national sales tax. In short, the survival of the estate tax, and of progressive taxation as we have known it, may only be temporary.

The full post is available here.