During a CNN Town Hall debate on Wednesday evening, Vermont Sen. Bernie Sanders (I) and Texas Sen. Ted Cruz (R) squared off on one especially pertinent topic: tax reform.
Throughout the night — though the discussion shifted and, at times, felt more like a presidential debate — Cruz repeatedly invoked the idea that repealing the estate tax, or “death tax” as Republicans like to call it, was a boon to small businesses and working Americans alike. Leaving it in place only hurt farmers and ranchers looking to pass down their property to their children.
In a press release following the debate, Cruz doubled down.
“Contrary to claims by Democrats, repealing the death tax will simplify the American tax system and provide needed tax relief for farmers, ranchers and small business owners,” Cruz stated, citing analysis from right-leaning think tank the Tax Foundation.
“…Family businesses that lack these resources to manage their estates are the ones held accountable to pay this tax rather than the wealthy. Eliminating this tax will help prevent financial hardships imposed by this inflated tax on individuals,” he added.
— Senator Ted Cruz (@SenTedCruz) October 19, 2017
Cruz is incorrect on most counts: According to the Center on Budget and Policy Priorities (CBPP), the estate tax only affects individuals with more than $5.49 million (or $10.98 million per married couple). In other words, “Only the estates of the wealthiest 0.2 percent of Americans — roughly 2 out of every 1,000 people who die — owe any estate tax”, according to CBPP analysis.
“Today, 99.8 percent of estates owe no estate tax at all, according to the Joint Committee on Taxation,” CBPP’s Chye-Ching Huang and Chloe Cho wrote in May.
…This is because of the tax’s high exemption amount, which has jumped from $650,000 per person in 2001 to $5.49 million per person in 2017. Thus, the estate tax is best characterized as a tax on very large inheritances by a small group of wealthy heirs; repeal would amount to a massive windfall averaging more than $3 million apiece for the top 0.2 percent, and more than $20 million for the wealthiest estates.
As the Brookings Institution’s Tax Policy Center explains, “Only an estimated 80 small farms and closely held businesses…will pay any estate tax in 2017. Such estates will represent about 1 percent of all taxable estate tax returns.”
In short, the top 10 percent of income earners will pay 88 percent of the estimated $19.95 billion estate tax liability in 2017. Small businesses and farms will pay just fifteen hundredths of 1 percent of that total.
Cruz also tried to claim on Wednesday that the estate tax was essentially a “double tax” that hurts heirs.
“The death tax is double taxation,” he wrote. “The descendant paid taxes on this income over the course of his or her lifetime, and death should not be a valid excuse to tax the same money again.”
But he’s wrong on this count as well. As CBPP points out, the majority of wealth eligible for the estate tax stems from “unrealized” capital gains that have never been subject to taxes before.
“Under the current tax system, capital gains tax is due on the appreciation of assets, such as real estate, stock, or an art collection, only when the owner ‘realizes’ the gain (usually by selling the asset),” CBPP explained. “Therefore, the increase in the value of an asset is never subject to income tax if the owner holds on to the asset until death.”
In addition, the idea that those farmers who are subject to the estate tax will be unable to cope with the massive financial burden is also misleading.
As the Washington Post reported in 2015, many family farms are subject to a valuation exemption, which “permits one’s gross estate to be reduced” by $1.12 million in 2017 according to IRS data. So long as the land is farmed for 10 years after the decedent’s death, the heirs can reduce their taxable estate burden.
Heirs may also take advantage of a special provision that “allows the tax to be paid off over 15 years, at low interest rates (with only interest due the first five years),” according to the Post.
Cruz capped off his claims on Wednesday night by asserting that, if nothing else, repealing the estate tax would help the economy and average American workers.
“According to the Tax Foundation, repeal of the death tax will result in an estimated 2.3 percent increase in capital invested in the U.S. economy, ultimately boosting productivity 0.7 percent resulting in increased labor force participation by the equivalent of 159,000 full-time jobs,” he wrote.
This, too, is incorrect. According to CBPP, which cited data from the Joint Committee on Taxation, “Repealing the estate tax would cost $269 billion over a decade…before counting the interest costs of adding to the debt.”
Repealing the estate tax, or “death tax,” may be an easy win at the ballot box for Republicans. But for citizens who don’t understand the consequences of those actions early on, it could spell disaster.