A new study assesses whether inheritance taxes boost net revenues

AMONG THE Democrats seeking America’s presidency, wealth taxes are a core division between the left and centre. Experts disagree on whether plutocrats can wriggle out of such levies, because few rich countries use them. Data on inheritance taxes, a close cousin, are also spotty. But a new study by Enrico Moretti of the University of California, Berkeley and Daniel Wilson of the Federal Reserve Bank of San Francisco suggests that at the state level, governments can reap gains from estate taxes, even though they are easy to avoid.

Their working paper makes use of a natural experiment. Estate taxes in America vary by state. However, before 2001 all ultra-rich Americans paid the same rate, because the federal government offset state-level estate taxes with a dollar-for-dollar credit. George W. Bush’s first tax law ended this rule. That made dying in Idaho, which has no estate tax, cheaper than in Washington state, which charges up to 20%.

The rich can only avoid federal taxes by renouncing citizenship. However, they can dodge state levies by moving. If they prioritise preserving their heirs’ fortunes, then states that taxed inheritances after 2001 should have become bereft of billionaires.

The study supports this theory. The authors did not know where the rich resided for tax purposes. Instead, they relied on Forbes magazine, which estimates billionaires’ net worth and assigns them to specific states. Starting in 2001, people whose listed state changed were much more likely to switch from states that charged an estate tax to ones that did not than the reverse.

Overall, estate-tax states lost 35% of their listed billionaires, and 50% of those aged over 65. If such moves reflected real changes in tax residence, they would cost states both estate taxes and the income taxes the departed would otherwise have paid.

However, the windfall from billionaires who stay is huge. In 1996 revenue in Arkansas rose by $148m after Bud Walton, a founder of Walmart, died. The authors find that of the 13 states that kept the tax, nine came out ahead. On average, states lose 60-70% of potential estate-tax proceeds as the rich flee. The rest can go to schools and roads.

Estate taxes do not always raise money. A few states tax income so heavily that an estate tax which led the rich to move away would cost them revenue. But Forbes’s data imply that enough tycoons want to “age in place” to make their heirs juicy targets. ■

Sources: “Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy”,by Enrico Moretti and Daniel J. Wilson, Oct 2019; The Economist