Gary Cohn, the head of President Trump's National Economic Council, said Thursday that repealing the estate tax was necessary to protect help farm families and small businesses.
"Are you seriously saying with a straight face that getting rid of the estate tax is about farmers and not about very wealthy families?" CNBC host John Harwood asked in a November 9 interview.
"What I'm saying is that it benefits farms, it benefits small businesses, it benefits a lot of different people," Cohn replied.
House Republicans' tax bill, introduced last week, would phase out the estate tax, and Cohn's remarks echoed President Trump's earlier statements in which he called the estate tax a "tremendous burden" on family farms.
But the data on who pays the estate tax paints a very different picture. For starters, the tax only kicks in on individuals with estates valued at more than $5.5 million — $11 million for married couples. Most people — as in more than 99.5 percent of people — don't pass away with that much in assets.
The graphic below represents all of the roughly 2.7 million Americans who will pass away in 2017. Each icon represents 11,310 individuals, for reasons that will become obvious in just one second.
See the very last icon at the bottom there, the one that's darker than the rest? Those are the 11,310 decedents who will have to file an estate tax return this year. These people represent not just the 1 percent, but the 0.5 percent — the richest of the rich in America today.
Some of them are, in fact, family farm and small business owners — we'll get to them in just a sec. But with assets valued at well over $5 million, it's hard to fit them under the conventional definition of “struggling.” And is it turns out, most of them won't have to pay any estate tax at all.
Of that 0.5 percent, the 11,310 deceased individuals filing an estate tax return, only some of them will actually end up owing any tax money. Here, each square represents one of those individuals — one of the top 0.5 percent wealthiest people in the nation.
Because of various deductions, write-offs and credits in the tax code, more than half of these individuals end up paying exactly zero estate tax. Among other things, they can deduct various expenses, mortgages and bequests to surviving spouses to whittle down their taxable income. They can donate some of their estate to charity, or they can shield their earnings via more complicated maneuvers, like placing them in trusts.
When you zero all that out you end up with a total of 5,460 individuals owing estate tax this year, according to an analysis by the Tax Policy Center — 0.2 percent of all decedents.
The rhetoric from estate tax critics might lead you to conclude that all or most of those 5,460 estates are from family farms or small businesses. But the Tax Policy Center's analysis says that's very far from the truth.
The Tax Policy Center defines a “business” or “farm” estate as one whose business or farm assets account for over half the value of the total estate. It then rather generously defines “small” as any estate in which those assets total no more than $5 million.
That means, then, that a small business or farm estate is valued at between $5 million and $10 million — we're talking about the richest of the rich here.
By that definition there are a total of 80 “small” businesses or small farms paying the estate tax each year, according to the Tax Policy Center. Small businesses and farms, in other words, account for roughly 1 percent of all estates that owe any estate tax.
Still, you might make the case that on principle, the estate tax is unfair to these farms and businesses, however few of them there are. The maximum estate tax rate is 40 percent, after all. If Dad passes away, leaving is $5.5 million farm to you, that means you have to sell off 40 percent of it to pay Uncle Sam, right?
Well, no. There's a huge difference between the maximum estate tax rate and the effective rate people actually end up paying. The 40 percent rate only kicks in on a value above the $5.5 million threshold. If Dad's farm is valued at $5,500,001, that means your tax bill when you inherit the farm will be a total of 40 cents — assuming you find not a single deduction.
Returning to the Tax Policy Center's numbers, the 80 small business and farm estates subject to the estate tax this year will owe a total of $30 million to the federal government. Split that up 80 ways and you get a rough average tax bill of $375,000.
That works out to an effective tax rate of about 3.75 percent for a farm valued at $10 million — about the top end of the estate size that TPC would consider a small farm or business.
Still! You might protest that many farms and small businesses run on tight margins, and that a sudden $375,000 tax bill could prove to be ruinous. But as it turns out, estates facing a tax bill have the option to pay it off over a period of 15 years, softening its impact.
If anyone knows the value of hard work, it's farmers and small business owners — including the successful few who end up paying a modest estate tax each year.