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Whose Presidential Candidate Estate Tax Plan Is Better?

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Estate Planning Collage

Estate Tax: Clinton, Trump and Sanders Each Weigh in By The Street

Whose estate tax plan would be better: the one put forth by Hillary Clinton, Donald Trump or Bernie Sanders? The Tax Foundation dove in to figure it out.

The Washington, D.C.-based tax research group this week released a model laying out the estate tax plans of Clinton, Trump and Sanders and what impact they would have on the economy, GDP and tax revenue. It found that Trump's plan to eliminate the estate tax might remove important distortionary incentives from the tax code and increase economic output, while Clinton's and Sanders' proposals may have less growth-driving effects.

Currently, the federal estate tax -- a tax on the transfer of a deceased person's estate -- is 40% for estates valued above a threshold of $5.45 million. For estates worth less than $5.45 million, the tax is zero. In other words, if you're not uber rich, this probably doesn't apply to you. In fact, according to the Center on Budget and Policy Priorities, citing the Joint Committee on Taxation, only the estates of the wealthiest 0.2% of Americans -- roughly two of every 1,000 people who die -- owe any estate tax.

Despite its application to only the richest Americans, the Tax Foundation report holds that the estate tax is one of the most economically harmful taxes per dollar of revenue raised.

"Quite simply, for every dollar's worth of wealth saved above $5.45 million, a taxpayer can only pass along 60 cents," writes analyst Alan Cole. "This creates a disincentive to save money above that amount, and encourages alternate options, such as spending it immediately on consumption goods."

Because of exemptions, most estates find a way to pay a rate lower than the stated 40%, with the actual average rate being only 3.7%. The Tax Foundation makes the argument that a system that lowers exemptions and lowers the rate could produce the same amount of revenue while having a smaller disincentive to save on the average dollar of wealth.

To be sure, not everyone agrees. A Congressional Research Service report cited by the Center on Budget and Policy Priorities found that the estate tax's net savings impact on the private sector is unclear (it causes some people to save more and others to save less) but that its overall effect on national saving is likely positive.

So how do the presidential candidates' plans shake out?

Trump's proposal to eliminate the estate tax entirely -- an idea many other Republicans share -- would pull down federal tax revenue by $240 billion over a 10-year period. However, the foundation's dynamic model that essentially assumes lower taxes leads to higher economic growth estimates that revenue losses would ultimately amount to $19 billion, while the GDP would increase by 0.8%, capital investment by 2.3%, and 159,000 full-time jobs would be added to the economy.

Clinton has laid out a plan return the estate tax to 2009 levels of an exemption of $3.5 million and a tax rate of 45%. The result would be an increase in tax collections but a slight reduction in productivity.

The Tax Foundation estimates the revenue impact to be $82 billion on a dynamic basis but warns of economic drags. It says the former secretary of state's proposal would lead to a 0.1% reduction in GDP, 0.3% fall in capital investment and reduce the labor force by 14,000 jobs.

Vermont Senator Sanders' tax strategy would be significantly more drastic than his Democratic rival's. He has also laid out a plan to lower the exemption to $3.5 million but has said he would increase rates on a progressive scale up to 65%.

The good news: the tax would immediately generate an enormous amount of revenue, which the foundation says would be $310 billion. The bad news: utilizing its dynamic model, GDP would fall by 1%, capital investment would decline 2.9% and nearly 200,000 jobs would disappear. Ultimately, it says revenue impact would be reduced to $28 billion over 10 years.

"For first-order effects, described as 'static' in this analysis, only average tax rates matter," Cole writes. "But when it comes to second-order effects concerning people's decisions, it is the marginal rate that matters."

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