Bernie's plan to soak the rich

  • 5 February 2019
  • NormanL

Vermont Sen. Bernie Sanders, who is again seeking the Demcoratic presidential nomination, has some competition for progressive votes. What's a would-be nominee to do? Why, propose a new tax that socks it to the rich. Or in Sanders' case, to the estates of the dead who happen to be considered rich in the eyes of the tax code.

According to the Tax Foundation, Sanders' plan may sound very progressive, but is unlikely to come close to raising the trillions of dollars he promises:

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.

These more punitive rates would, naturally, and quite predictably, lead to people sheltering their assets from the tax man:

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 let's not forget the larger economic consequences:

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.

All fair and rational points. But they won't sell on the campaign trail, where raising taxes in one form or another -- regardless of their effectiveness or consequences -- is all the rage among Democratic candidates.