There is a meme going around ag circles on social media that claims that Hillary Clinton is trying to tax family farms with an estate tax of 65%. There is a lot wrong with this meme, but it’s really making the rounds, so it’s worth addressing.
Clinton is proposing a few changes to the estate tax. Adding a top marginal rate of 65% on inheritances of over $500 million for individuals and $1 billion for couples is one of those changes. Let’s take a look at the whole thing and some important context for the reform.
Vox provides some welcome context to the scope of what we are talking about here:
Basically nobody pays the estate tax; in 2013, nearly 2.6 million people in the US died, and only 4,687 of them paid the tax. That’s only 0.18 percent of deaths. And those who did pay it were overwhelmingly rich; it’s the most progressive tax in the federal code, and the first $5.45 million of an estate, or $10.9 million for couples, is totally exempt from taxation.
1. So, currently, a couple can inherit an estate of nearly $11 million without any tax liability. What Clinton is proposing is lowering the exemption down to $3.5 million for individuals and $7 million for couples. This is probably the most consequential aspect of her reform of the estate tax for family farms.
However, that exemption, as you can see in the figure below is still very high by historical standards.
2. Clinton’s proposal raises the bottom rate from 40% to 45% on estates of $3.5/7 million to estates of $499/999 million.
3. The top rate of 65% would only be applicable to estates of over $500 million and $1 billion for couples.
4. A family farm that is worth $1 billion in land, but barely making it should think about selling off some land anyways – or getting out of farming all together, because if they can’t figure out how to make a billion dollar asset generate some revenue, then they are doing it wrong.
5. One of the reasons the farm land is valuable on these big farms is because farm subsidies are tied to the acres – the subsidies become baked into the value of the land. There is a real irony here in complaining about being land rich and cash poor to avoid taxes on land that is valuable because it is heavily subsidized.
The top estate tax rate was 70% or higher from the 1930s until 1986.
6. Summing up so far. The first $3.5/7 million is exempt. The next half billion/billion would be at 45%. It’s only the amount OVER a half billion/billion that would be taxed at 65% – and even then, unless your farm is worth multiple billions, then only a small amount of your estate is taxed at 65%.
It’s a top MARGINAL rate. 7. The farm lobbies are always recruited to play poster child in any attempt to raise the estate tax. Back in 1998, it was much lower – about $900,000, the American Farm Bureau lobbied against an increase, but could not come up with a single example of a farm that had sold off to pay the tax.
It’s worth quoting Pulitzer Prize winning tax law reporter David Cay Johnston at length here:
How many of America’s 2.2 million farms have been sold to pay estate taxes? None.
Committee Republicans tried to explain away that inconvenient fact by saying that the estate tax forces farmers to set aside so much money to pay it that it interferes with their operations. Their rhetoric was as long as the facts were short.
Some committee members asserted that the estate tax forces heirs to sell farmland to pay estate taxes, resulting in smaller and less efficient operations. But the only example cited by a witness dated to the late 1990s, when the amount of wealth exempt from the estate tax was about a tenth of what it is today. That farm exists in an urban setting — meaning its continued operation is not the highest and best use of that land.
Estate tax or no, farmers have always sold out in urban areas and moved to less costly land — a lesson I learned in the 1950s growing up on an orange ranch in Orange, California. Hundreds of acres of orchards where my pals and I built forts with orange crates, re-enacted World War II and camped out on summer nights were bulldozed, the huge piles of trees set ablaze to make way for suburban houses.
But the Bush White House could not point me to a single example, nor could the American Farm Bureau or other organizations I contacted.
Harlyn Riekena and two dozen other central Iowa farmers — every one a Republican — told me they favored increasing the estate tax exemption, then about $1.3 million for a married couple, but not the repeal proposed by Bush and other party leaders, which they saw as a favor to Wall Street.
When I met with the Marshall County board of supervisors, all of them farmers, they laughed out loud when asked if we needed estate tax repeal to save family farms. In salty language, one supervisor said he was surprised at the gullibility of network television journalists whose reports lacked any skepticism about Bush’s statements.
Professor Neil Harl, an Iowa State University economist whose tax advice has made him well known among Midwest farmers, said for 35 years he searched without finding one family farm lost to the estate tax.
“It’s a myth,” he said.
8. But, yes. Some very large farms – that do not do sufficient estate planning – may end up having to sell off some land to pay their estate tax when they inherit it. All that means, is that the farm the kids inherit will be smaller than the farm their parents owned. Just like everyone else’s inheritance that is subject to the estate tax. And like anyone else inheriting a business with an estate tax liability, they would borrow against the asset to pay the tax and then pay off the debt from revenues. That’s how it works.
Prime Iowa corn / soy land currently goes for about $10,000 an acre. So it would take 100,000 acres to get to $1 billion worth of farm land to trigger that top marginal rate of 65% (in a simple model where the whole estate is just land).
OTH , an acre of Napa Valley vineyard can sell from $50,000 to $300,000, so you could get to a billion there pretty quickly, but those big vineyards are big business. California orchard land goes for $15,000-$32,000 an acre and those are the farms where it would be easier for a big family farm that did insufficient estate planning to find itself land rich, cash poor, and facing a major tax liability.
Well run family farms take advantage of several strategies to manage the transfer of the farm from one generations to the next, including ownership under limited partnership, family limited partnerships, transfer through purchase prior to estate transfer, and incorporation with ownership of stock for various family members.
Thus, in 2013, only 20 U.S. estates that owned farms or small businesses paid any estate taxes—and those 20 paid an average of 4.9 percent of their value.
9. An other irony here is that farmers are generally Jeffersonian in their political orientation. That is unsurprising, since Jefferson wanted a rural America of yeoman farmers at the center of our national character. But Jefferson began the American tradition of breaking up inter-generational wealth that is one of the centerpieces of the American political tradition.
America’s early state governments threw out laws that encouraged the accumulation of wealth over generations, following the example Thomas Jefferson set with the Virginia legislature in 1777. They got rid of the English legal precedents of primogeniture and entail—under which titles and property were inherited in their entirety by the oldest male heir—forcing families to divvy up their wealth among more children. Jefferson cited Adam Smith, who called the idea that people should control their estates well beyond their death “manifestly absurd.” Jefferson insisted that “the earth belongs in usufruct to the living.”
Similarly, Alexis de Tocqueville identified the breaking-up of estates as one of the cornerstones of the young country’s success. “What is most important for democracy is not that great fortunes should not exist,” he wrote, “but that great fortunes should not remain in the same hands. In that way there are rich men, but they do not form a class.”
The purpose of an estate tax with a high marginal rate is as much about breaking up concentrated inter-generational wealth as it is about raising revenues.
10. BTW: It’s also NOT triple taxation. You are taxed once – when you inherit the estate
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