I could not resist responding to Mr. Lundberg's "economics 101" arguments supporting repeal of the estate tax in his Dec. 13 letter. While I'm at it, I'll explain a few other "quirks" in tax policy that clearly benefit the well-off over the middle class taxpayer.
Mr. Lundberg correctly states the estate tax kicks in at $5.5 million of taxable income with a 40 percent tax rate. Two things. That's for a single filer. For a married couple it doubles to nearly $11M. Second, the tax rate is applied to the amount "over" $5.5M or $11M. The first $5.5M/$11M is NOT taxed. So this horrible tax burden is not quite as bad as he makes it appear. His economics 101 case focuses on how much money these "wealthier" people spend and how many jobs they create with their disposable income. Well, excuse me for my bluntness, but besides $5.5M/$11M plus 60 percent of everything over not being chunk change, these people are dead! They are no longer spending money or creating jobs! Further, if these wealthier folks were so busy spending their money on big ticket items and employee wages, why do they have so darn much money left when they die? A possible answer -- one can only consume and buy so much. That's why most economists agree tax cuts for the wealthy don't do much to stimulate the economy -- their needs are already met, and at some point even extravagant wants become saturated.
One might argue this money would go to heirs instead of the government, and they would spend the money. Well, we don't really know, do we? They didn't earn it. Are we creating a class of "trust-funders"? If we base society's ideal of success upon merit, as Trump would base immigration policy and many would view a pillar of the American experiment, aristocratic inheritance is not necessarily healthy. See French and Russian Revolutions.
Mr. Lundberg then refutes as fallacy that repeal of the estate tax benefits the wealthy in return for political contributions, based upon "many wealthy people" living in "blue" cities and states. Well, I'm sorry to reveal that these "blue" states and cities are far from 100 percent Democrat and even further from 100 percent wealthy. Voting demographics clearly show the wealthy predominantly support the Republican Party, whether they reside in "blue" or "red" districts. Shaving 2.6 percent off the tax rate for income over $1M (for married filers, from 39.6 to 37 percent), as the current tax bill does, saves the wealthy $26,000 on each additional million of income over $1M EVERY SINGLE year. That's a pretty decent payoff for your $2,700 political contribution every four years, whether you live in NYC or Delta.
Other tax policy "quirks" that few taxpayers understand. First, how raising income brackets and lowering tax rates favor wealthy earners. In addition to millionaires saving $26K on each million of income over $1M, taxpayers making $1M will save ANOTHER $23K simply from raising the top income bracket from $500K to $1M and lowering the tax rate to 35 percent (4.6 percent tax savings) on that $500K difference. Besides that, the wealthy will have their tax liability further reduced by the same amount as every middle class taxpayer on income below $500K, because we all pay the same tax rate on each increment of taxable income. So on top of $23K and the $26K per $1M (more than many Americans' entire annual income), you can add all the tax savings those making up to $500K will get. These aren't tax cuts for the rich?
Second, how deductions create more tax savings for the wealthy than the middle class. I'll use the mortgage interest deduction, but the example applies to all deductions, whether charitable contributions, state and local taxes, retirement savings, even the standard deduction! Let's say two families have an identical home mortgage interest deduction of $20,000. One family has income of $60,000 after deductions, putting them in the new 12 percent tax bracket. Assuming this family's entire mortgage interest exceeds the standard deduction (the best possible case), they will save 12 percent on the $20,000 deduction, or a $2400 reduction in taxes. A second family has income of $500,000 after deductions, placing them in the new 35 percent tax bracket. Again, assuming this family's mortgage interest is above their standard deduction, they will save 35 percent on the $20,000 deduction, or a whopping $7,000 reduction in taxes -- nearly three times more in savings. Result? The middle class family pays net $17,600 of home mortgage interest; the wealthier family pays net $13,000. What a deal!