The Republican Estate Tax Giveaway
Just before Christmas, President Trump signed the Republican tax bill into law. Changes to the estate tax included in the bill are a $4.5-million Christmas gift to each of the wealthiest families in America. President Trump was absolutely right when he told his friends, “You all just got a lot richer.”
At a time of stagnant wages and rising inequality, Republican changes to the estate tax take us in the wrong direction. Although Republicans often claim that the estate tax is double taxation, it frequently applies to investments gains that were never taxed in the first place. The estate tax is a century-old bulwark against inequality and incentivizes charitable giving. The $83 billion that Republicans will put on the national credit card to cut the estate tax would have been better spent on almost anything, such as reducing child poverty or making education more affordable.
The estate tax has been in effect continuously for over a century; previous iterations go back as far as 1797. It has been used as a tool against unfettered accumulation of untaxed wealth — that’s why Republicans have worked for decades to undo it.
Under the estate tax rules that President Obama negotiated with congressional Republicans for the American Tax Relief Act of 2012, couples could pass on up to $11 million before paying any taxes. Assets over that threshold were taxed at a rate of 40 percent.
Under Part VI of the tax bill, the Republicans doubled the $11-million estate tax exemption. Now wealthy couples will be able to pass on $22 million to their heirs without paying a dime in estate taxes — a cut worth almost $4.5 million to every family with assets above that threshold.
Much of the wealth hit by the estate tax has never been taxed before because of a loophole known as the “angel of death” (or “stepped-up basis” to the tax nerds out there). Over a lifetime, once would expect the value of assets like stocks and real estate to increase above their original purchase price or “basis.” The difference between the current value and the basis is the capital gain. If you sell that asset, the government taxes that capital gain. But under current law, on the day you die the basis steps up to the current value, wiping away the capital gains taxes that might otherwise be owed. According to the Treasury Department, this loophole alone will cost the federal government $416 billion over the next decade.
By way of example, if you had purchased $50,000 worth of stock in Apple in 1980, it would be worth $22.1 million on the first trading day of this year, right around the amount that can now be passed on tax-free. If you sold that stock, you would pay around $5.3 million in capital gains taxes. If you had died last year, about $4.4 million would go to the federal government in estate taxes. But under the new Republican tax law the lucky recipients of this inheritance will get the entire amount tax-free.
In 2016, only 5,200 estates paid the estate tax, totaling $18 billion, according to the IRS. Over half the assets subject to the tax were stock or real estate, while fewer than 100 family farms or closely held businesses pay the estate tax each year.
Reducing the estate tax will also decrease charitable giving by billions of dollars each year, according to the Tax Policy Center. Unlike assets passed on to heirs, the estate tax does not touch charitable bequests. So doubling the estate tax exemption will reduce the incentive for wealthy families to give to charity rather than their children.
The Republican’s changes to the estate tax will cost $83 billion over the next 10 years — all of it added to the national debt. That money could have paid for tuition-free community college or partially covered the cost of a tax credit to help young children escape poverty. Instead, we got a needless giveaway to the ultra-wealthy that will exacerbate inequality and provide an unearned windfall to a lucky few.
Devin Gould is a graduate student at Princeton University’s School of Public and International Affairs. This past summer he was a graduate research intern at the nonpartisan Urban-Brookings Tax Policy Center.
