909-599-1605 globeto@gmail.com
Sanders’ Estate Tax Plan Won’t Likely Raise the Revenue Intended

Sanders’ Estate Tax Plan Won’t Likely Raise the Revenue Intended

Tax Policy – Sanders’ Estate Tax Plan Won’t Likely Raise the Revenue Intended

Today, Senator Bernie Sanders (I-VT) introduced a plan to make the estate tax more progressive, in hopes that this wealth transfer tax will raise as much as $315 billion over ten years, and as much as $2.2 trillion over the lifetime of the policy. Sanders’ top marginal rate would return the estate tax to its historic high of 77 percent—the top rate that existed from 1942 to 1976.

But despite the progressivity, there is good reason to believe Sanders’ plan won’t raise revenue as intended.

Currently, the estate tax levies a 40 percent tax on the total value of property passed to heirs beyond a roughly $11 million exemption for individuals ($22 million for married couples). Sen. Sanders’ plan would:

  • Reduce the exemption to $3.5 million, and tax the value of estates up to $10 million at a rate of 45 percent
  • Tax estates valued between $10 million and $50 million at a rate of 50 percent
  • Tax estates valued between $50 million and $1 billion at 55 percent
  • Tax estates valued at more than $1 billion at a rate of 77 percent.

This progressivity could hamper revenue collections for a few reasons.

For one, this tax on the wealthiest would target (0.2 percent of the country, according to Sen. Sanders) with relatively high marginal tax rates that increase with an estate’s value. Because of the high rates and the progressive rate structure, high-net-worth individuals will have a strong incentive to shelter their assets to avoid the tax.

In general, tax avoidance is costly both from an economic standpoint (because it encourages unproductive tax planning) and a revenue standpoint, as people hide their money from tax collectors. But the estate tax generates particularly large compliance costs. In fact, research has shown that the compliance costs associated with estate planning are actually greater than the revenue the estate tax generates.

And perhaps most importantly, Sen. Sanders’ plan is problematic because it would increase the estate tax’s burden on investment, a key driver of economic growth. To the extent that Sanders’ plan encourages people to consume their income instead of invest it, it will reduce economic output, and with it, government revenues on a dynamic basis. This is because reductions in the size of the economy reduce the output available to government to tax.

While progressivity may look appealing—particularly at a time when policymakers in Congress seem to be competing on how best to extract revenue from the wealthiest in the country—it may not raise the revenue intended.


Source: Tax Policy – Sanders’ Estate Tax Plan Won’t Likely Raise the Revenue Intended

Income Taxes on the Top 0.1 Percent Weren’t Much Higher in the 1950s

Income Taxes on the Top 0.1 Percent Weren’t Much Higher in the 1950s

Tax Policy – Income Taxes on the Top 0.1 Percent Weren’t Much Higher in the 1950s

Lawmakers have recently announced plans that would increase the tax burden on wealthy Americans, ranging from higher marginal income tax rates to wealth taxes. These proposals are flawed in several ways, including in their lack of understanding of tax history.

While marginal income tax rates have come down from their highs of 91 and 92 percent in the 1950s, changes in the tax base—how much and what types of income are subject to the tax—mean the effective rates on the wealthy haven’t changed nearly as much.

The graph below illustrates the average tax rates that the top 0.1 percent of Americans faced over the last century, based on research from Thomas Piketty, Emmanuel Saez, and Gabriel Zucman.[1] The blue line includes the impact of all federal, state, and local taxes on individual income, payroll taxes, estates, corporate profits, properties, and sales. The purple line shows income taxes only, including federal, state, and local.

Effective tax rates on the top o.1 percent of u.s. households

While the average rates for total taxes on the top 0.1 percent have fallen 10.8 percentage points from the 1950s, average income tax rates have remained relatively stable. In the 1950s, the top 0.1 percent of households paid average income tax rates of 21.0 percent, versus 20.7 percent as of 2014.

How could it be that a top marginal income tax rate of 91 percent resulted in an average income tax rate (including state and local income taxes!) of only 21.0 percent for the top 0.1 percent during the 1950s? A previous Tax Foundation analysis explains:

  • The 91 percent bracket of 1950 only applied to households with income over $200,000 (or about $2 million in today’s dollars). Only a small number of taxpayers would have had enough income to fall into the top bracket—fewer than 10,000 households, according to an article in The Wall Street Journal.
  • Even among households that did fall into the 91 percent bracket, the majority of their income was not necessarily subject to that top bracket. After all, the 91 percent bracket only applied to income above $200,000, not to every single dollar earned by households.
  • Finally, it is very likely that the existence of a 91 percent bracket led to significant tax avoidance and lower reported income. Many studies show that, as marginal tax rates rise, income reported by taxpayers goes down. As a result, the existence of the 91 percent bracket did not necessarily lead to significantly higher revenue collections from the wealthy.

Another factor to consider is that the wealthy aren’t a monolithic group of taxpayers. In fact, IRS data shows that there is typically a lot of churn within the group of top earners. For example, the number of taxpayers who report incomes of $1 million or more is highly variable, and fluctuates with the business cycle.

Ultimately, tax rates, while important, are only one part of the story. The top 0.1 percent of taxpayers pay nearly the same average tax rates today as they did in the 1950s because of other changes made to the tax system. And even with these changes, the American tax system is already highly progressive: according to the most recent IRS data, the top 0.1 percent of taxpayers paid more than six times the share of federal income taxes than the bottom 50 percent of taxpayers combined.

Context like this is crucial for discussions of how much the wealthy pay in taxes today, and how much they’ve paid over time. By historical standards, the very top income earners do not face an unusually low income tax burden.


[1] Some of the distributional assumptions in the Piketty, Saez, and Zucman paper are questionable. In particular, the authors assume that the full burden of the corporate income tax falls on owners of capital, which may not be correct. It is likely that the corporate income tax burden falls on shareholders, workers, and consumers. See Stephen J. Entin, “Labor Bears Much of the Cost of the Corporate Tax,” Tax Foundation, Oct. 24, 2017, https://taxfoundation.org/labor-bears-corporate-tax/.


Source: Tax Policy – Income Taxes on the Top 0.1 Percent Weren’t Much Higher in the 1950s

Implementing Phase Three of Individual Income Tax Cuts in Arkansas

Implementing Phase Three of Individual Income Tax Cuts in Arkansas

Tax Policy – Implementing Phase Three of Individual Income Tax Cuts in Arkansas

Yesterday, Governor Hutchinson and legislative leaders in Arkansas announced their final plan for restructuring Arkansas’s individual income tax brackets. After more than 18 months of study, the Arkansas General Assembly will consider the plan starting next week. The plan would lower tax liabilities for a number of filers in Arkansas and implements the third phase of tax cuts in the Natural State.

The plan introduced yesterday differs from previous versions discussed in the Tax Reform and Relief Legislative Task Force. Several weeks ago, it was reported that the previous version of the “2/4/5.9% plan,” as it was known, contained a miscalculation, which would have increased taxes for approximately 200,000 Arkansans.

This new plan targets the tax relief onto higher-income Arkansans, defined as those with taxable incomes above $79,300. Arkansas currently uses three rate schedules for individuals, based on their income. This plan would simplify the third rate schedule, reducing state revenues by $97 million over the next several years.

Starting on January 1, 2020, the plan would simplify the brackets for those above $79,300 in income from six to three, with the top rate falling from 6.9 percent to 6.6 percent. Then, on January 1, 2021, the top rate would be cut again from 6.6 percent to 5.9 percent. At the same time, the top rate on the middle rate schedule, for those between $22,200 and $79,300 in income, would drop from 6 percent to 5.9 percent, to match the top table.

Individual Income Tax Rates (2019)
Total Income Under $22,000   Total Income Between $22,200 and $79,300   Total Income Above $79,300
$0-$4,499 0%   $0-$4,499 0.75%   $0-$4,499 0.90%
$4,500-$8,899 2% $4,500-$8,899 2.50% $4,500-$8,899 2.50%
$8,900-$13,399 3% $8,900-$13,399 3.50% $8,900-$13,399 3.50%
$13,400-$22,199 3.40% $13,400-$22,199 4.50% $13,400-$22,199 4.50%
  $22,200-$37,199 5% $22,200-$37,199 6.00%
$37,200-$79,300 6% $37,200+ 6.90%

Note: the exact brackets will change slightly due to Arkansas’s policy of inflation-adjusting its brackets annually.

Total Income Under $22,200   Total Income Between $22,201 and $79,300   Total Income Above $79,300
Individual Income Tax Rates (2021, Proposed)
$0-$4,499 0%   $0-$4,499 0.75%   $0-$4,000 2.00%
$4,500-$8,899 2% $4,500-$8,899 2.50% $4,000-$8,000 4.00%
$8,900-$13,399 3% $8,900-$13,399 3.50% $8,000+ 5.90%
$13,400-$22,199 3.40% $13,400-$22,199 4.50%  
  $22,200-$37,199 5%
$37,200-$79,300 5.90%

The Impact of Tax Cuts on Arkansas Households, tax savings since 2015 , Arkansas tax reform, Arkansas tax cuts

We have estimated the impact of these tax cuts on seven sample taxpayers in Arkansas. As shown below, taxes would be lowered for those with income above $37,200. Those below that income level do not see any tax cuts under this plan.

The Impact of Tax Cuts on Arkansas Households, tax savings under 2019 proposal, Arkansas tax reform, Arkansas tax cuts

However, these cuts are the third phase of the individual income tax cuts in Arkansas. Looking only at the 2019 proposal misses much of the work done by the General Assembly in previous sessions. First, in 2015, it passed tax cuts for individuals with incomes between $21,000 and $75,000. Second, in 2017, it passed tax cuts for individuals with incomes below $21,000. (Single individuals with income below $11,969 have no income tax liability due to Arkansas’s low-income tax credit first adopted in 1991 and expanded in 2007.) So, this final plan brings those with incomes above $75,000 closer to the cuts already passed in 2015 and 2017. (These numbers vary slightly due to Arkansas’s policy of inflation-adjusting their tax brackets annually.)

Here, we see that the income tax cuts are spread throughout the income spectrum. James has seen his income tax cut by 30.7 percent since 2015, compared to a 14 percent reduction for Tori and a 6.2 percent reduction for Lucia. Adam and Christine receive the largest nominal tax cut, $1,880.14, but as a percent of their income, their cut is among the smallest.

The $97 million revenue cost is also similar to that of the 2015 tax cut targeted at middle-income taxpayers.

And the reduction of the top rate from 6.9 percent to 5.9 percent makes Arkansas more competitive among its neighbors and in the South generally. Currently, the 6.9 percent rate is the highest among Arkansas’s neighboring states, and the second highest in the South (just below South Carolina’s 7.0 percent). This reduction brings Arkansas roughly in line with neighboring Missouri (5.9 percent) and Louisiana (6.0 percent), as well as Georgia and Kentucky (both at 6.0 percent). Neighboring Oklahoma and Mississippi are still slightly lower at 5.0 percent, and Texas and Tennessee have no income tax on wages and salaries, so there is still work to be done in the future. Ideally, future legislatures will work to further simplify the rate schedules, but this is a big step in the right direction.

Finally, these examples do not include other expected tax changes in Arkansas this legislative session. This bill is the first in a series of reforms planned by the General Assembly. The legislature is expected to consider reforms to its corporate income tax rate and tax base and changes to the state’s sales tax following the U.S. Supreme Court’s Wayfair decision, among other changes.

Calculation Assumptions

For our calculations, we used the Arkansas tax system as it exists on both January 1, 2015 and January 1, 2019. For the 2019 calculations, these are after the scheduled phase-in of the low-income tax changes effective on January 1. We assumed all filers used the standard deduction, for simplicity and comparisons (those though with itemized deductions will not see an increase, unlike previous versions of the plan). These calculations assume the rate structure under the “2/4/5.9% plan” when it’s fully phased in in 2021.

These calculations do not include any other tax changes, such as taxing online transactions under a sales tax, other sales tax base changes, or any business-side changes.


Source: Tax Policy – Implementing Phase Three of Individual Income Tax Cuts in Arkansas

What the U.S. Can Learn from the Adoption (and Repeal) of Wealth Taxes in the OECD

What the U.S. Can Learn from the Adoption (and Repeal) of Wealth Taxes in the OECD

Tax Policy – What the U.S. Can Learn from the Adoption (and Repeal) of Wealth Taxes in the OECD

Recent discussions of a proposed wealth tax for the United States have included little information about trends in wealth taxation among other developed nations. However, those trends and the current state of wealth taxes in OECD countries can provide context for this new proposal.

The OECD maintains detailed tax revenue statistics going back to 1965 for its 36 member countries. The data includes revenues from taxes on the net wealth of individuals.

According to these data, the number of current OECD members that have collected revenue from net wealth taxes has grown from nine in 1965 to a peak of 14 in 1996 to just four in 2017.

OECD countries with revenues from net wealth taxes on individuals, wealth tax warren

In the OECD data, the countries that collected revenues from net wealth taxes on individuals in 2017 are Switzerland, Spain, France, and Norway. Revenues from net wealth taxes made up 3.62 percent of revenues in Switzerland in 2017 but just 0.55 percent of revenues in Spain. Among those four OECD countries collecting revenues from net wealth taxes, revenues made up just 1.45 percent of total revenues on average in 2017.

In 2018, France dropped its net wealth tax, and Belgium introduced its own version of a net wealth tax.

An OECD report about wealth taxes argues that these taxes can harm risk-taking and entrepreneurship, harming innovation and impacting long-term growth. The report also suggests that a net wealth tax could spur investment and risk-taking. Essentially, the argument is that because a wealth tax would erode the after-tax return for an entrepreneur, that entrepreneur might engage in even riskier ventures to maximize a potential return. However, a wealth tax would be a particularly poor way to encourage risk-taking.

The revenue data from the OECD does not perfectly match the policy changes made by countries. For instance, Austria effectively repealed its net wealth tax in 1994, but revenues from the tax continued to trickle in until 2000. The OECD also conducted a survey of countries regarding their net wealth taxes and the trend for collecting revenues from net wealth taxes is similar to the survey responses.

Additionally, the OECD data definitions leave out two countries that currently administer a net wealth tax, although in unique ways. The Netherlands applies a tax on net wealth as part of its income tax, and Italy has a net wealth tax that applies to assets and property held abroad by Italian taxpayers. Including the Netherlands and Italy, there are six OECD countries that currently administer a net wealth tax on individuals.

Current OECD Countries with a Net Wealth Tax

Source: EY, Worldwide Estate and Inheritance Tax Guide

Country Rate Base

Belgium

0.15 percent

Average value of securities holdings if the value is greater than €500,000 ($571,000) per account holder.

Italy

0.2 percent for financial assets, 0.76 percent for real estate properties

Financial assets and real estate properties held abroad by Italian taxpayers.

Netherlands

0.61 percent to 1.61 percent (effective)

Net wealth excluding primary residence and substantial interests in companies. Part of the income tax.

Norway

0.7 percent at the municipality level and 0.15 percent at the national level

Fair market value of assets minus debt. Tax applies to value of wealth above NOK1.48 million ($174,400).

Spain

0.2 percent to 2.5 percent depending on the region

May differ depending on the region, but generally value of assets minus value of liabilities.

Switzerland

Varies depending on the Canton

Gross assets minus debts.

Some countries have unique exclusions to their wealth taxes. Italy’s net wealth tax has a provision where new Italian residents who relocate to Italy for tax purposes may not be subject to the wealth tax. In Spain, the net wealth tax effectively only applies to taxpayers who do not reside in Madrid, because the city provides 100 percent relief from the tax.

Over the years, countries have repealed their net wealth taxes for various reasons, but economic impact is included in those reasons. French Finance Minister Bruno LeMaire has made it clear that the repeal of the wealth tax in France is part of a reform package designed to “attract more foreign investment.” The French reform package also includes a planned reduction in the corporate tax rate.

The lessons from other countries’ experiences with wealth taxes should inform policymakers in the U.S. as they consider such a proposal. With so many countries having adopted and then abandoned a wealth tax, perhaps the U.S. should avoid adopting one in the first place.


Source: Tax Policy – What the U.S. Can Learn from the Adoption (and Repeal) of Wealth Taxes in the OECD