Donald Trump’s economic agenda features reducing many taxes—but the Estate Tax is one that he proposes eliminating altogether.
Here Trump is in line with establishment Republicans and conservative economists. Who among them doesn’t want to get rid of the most progressive tax of all―which they call the Death Tax just to remove any doubt.
And, as so often, Democrats are politically near-sighted. With President Obama in the White House, the Republicans couldn’t eliminate the tax. However, the Democrats have done nothing to protect the Estate Tax for the next time the Republicans have the power to kill it.
There is only one way to do so: Estate tax revenues must be dedicated to a broadly desired purpose. Taxes that are so dedicated may be adjusted, but they aren’t eliminated. President George W. Bush’s attempt to reform Social Security is a clear example: His reforms didn’t include eliminating the payroll taxes which finance Social Security.
Hmm… what should Estate Taxes be dedicated to? The $20 billion generated by the tax has a minimal impact on our $3 trillion federal budget—or the projected Social Security shortfall.
Here’s an idea: Estate taxes should be dedicated to estates—to passing wealth to the next generation.
The tax has been generating $20 billion (even with an exemption of over $5 million) or $5,000 per newborn. That $5,000 would then be invested in a government-managed or supervised U.S. equity index fund.
This account would be held for 60 years. Economists expect that U.S. equity funds will generate 5.5-6.5% real returns annually over that period—which results in each married couple ultimately holding an account of $250,000-$435,000—in current dollars! (Today, half of Americans own no equities. The median holdings of those that do are less than $100,000.)
At that point, the accounts would be passed on to their children! The recipients of these funds—let’s call them Universal Trust Funds—would also receive Universal Trust Funds for their heirs. And on into the future.
The Estate Tax is projected to increase—perhaps to as much as $50 billion annually—over the next decade with no increase in the rate. So the Universal Trust Funds could grow as well: to $600,000, $800,000, and, to the children of today’s children, $1 million per couple in current dollars, even with indexing the estate tax rate for inflation. (As long as our birthrate does not explode.)
Experts say that less than 1% of Americans inherit over $400,000. Why shouldn’t we take this “lucky” figure to everyone? Capitalism for All!
Oh, wait. You think this is “socialism”? Hardly.
Conservatives should welcome Universal Trust Funds as every American would then have a stake not just in the U.S. government, but in the U.S. stock market, as well. Americans would not be dependent on the government for annual income. And this proposal does not confiscate estates, so heirs of the wealthy will still inherit enough to become rich — even super-rich.
Should Donald Trump, his kids, and the kids of his peers be the only ones to get a head start in life? What did Trump do to earn his inheritance? (He probably brags that he was smart enough to be born to the right parents.)
There isn’t room here to go into all the details that this proposal raises (i.e. , should a dollar be deducted from one’s trust fund for every dollar above the trust fund amount inherited elsewhere? What financial training would people receive?).
But these are details. After all, if $500 had been invested for every newborn at Social Security’s initial funding in 1937, each of the 54 million American retirees since 2002 would have about $200,000 each, $400,000 per couple, to pass on — all while retaining their Social Security.
Now, some liberals argue that we have too many immediate needs for Estate Tax revenue, including poverty. But the Estate Tax doesn’t generate enough to resolve these needs. Why not devote its revenue to a program that will transform America―even if it is over the long run?
Universal Trust Funds could virtually eliminate poverty while expanding the middle class. Will any short-run expenditure do the same?
So, to those liberals defending the Estate Tax: once the Estate Tax is dedicated to Universal Trust Funds, the issue of its existence will be over. We won’t ever have to debate the Estate Tax again.
But, unless we dedicate the tax to this―or some other popular program―if Donald Trump is elected President while Republicans control Congress, the issue may not be terminated, but the tax will be.