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Hillary Clinton's estate tax plan leaves rates way lower than they were in Bill's day

Whaddaya gonna do?
Whaddaya gonna do?
Joe Raedle/Getty Images
Dylan Matthews is a senior correspondent and head writer for Vox's Future Perfect section and has worked at Vox since 2014. He is particularly interested in global health and pandemic prevention, anti-poverty efforts, economic policy and theory, and conflicts about the right way to do philanthropy.

With Bernie Sanders now leading in both Iowa and New Hampshire, Hillary Clinton's been trying to blunt his economic populist appeal by showing that she, too, is serious about taxing rich people. First she proposed a new 4 percent surcharge on all income above $5 million (including capital gains and investment income), and now she's proposing a hike in the estate tax. Clinton would increase the maximum rate to 45 percent from the current maximum of 40, and decrease the lifetime exemption from estate and gift taxes to $3.5 million from $5.45 million.

But it's important to put this proposal in context. Not only does the 45 percent figure pale in comparison to Sanders's proposed 65 percent top rate, but a 45 percent top rate is actually quite low by historical standards. The current 40 percent rate, and the 35 percent rate that preceded it, are the lowest since 1932. The rate peaked at 77 percent, and stayed there from 1940 to 1976. When President Clinton left office, it was 55 percent.

It was only after the Bush tax cuts ratcheted the tax back, ultimately eliminating them in 2010, that President Obama and then-Senate Minority Leader Mitch McConnell reached a deal to retroactively bring the tax back at 35 percent for that year. The 2012 tax deal raised the rate again to 40 percent, where it's been ever since:

The $3.5 million exemption is also very high by historical standards:

In fairness, Sanders's plan is more tepid than it initially appears. The 65 percent rate only applies to estates worth $1 billion or more. His exemption would also be $3.5 million for individuals, just like Clinton's. They'd even share the 45 percent rate for estates between $3.5 million and $10 million; Sanders adds a 50 percent bracket for estates between $10 million and $50 million, and then a 55 percent bracket for estates larger than that, plus a 10 percent surtax for billionaires (hence the 65 percent figure). It's a significantly bigger tax hike than Clinton's, but it still doesn't get the estate tax back up to its 1999 or 2000 levels.

Clinton and Sanders are also both declining to pursue more fundamental reforms to the so-called "death tax." A number of tax analysts, notably NYU Law's Lily Batchelder, have proposed moving to an inheritance tax, where the living beneficiaries of an estate, rather than the deceased person's estate itself, would include inheritance money in their taxable income and perhaps pay an additional surtax on it.

This ensures that the most affluent inheritors pay the most, and giving each beneficiary a lifetime exclusion of $1 million to $2 million would encourage estates to distribute to more people, breaking themselves up into smaller pieces and more effectively combating entrenched dynamic wealth than the current tax. Inheritance taxation also has a political benefit, in that it would mean the government is not technically taxing dead people.