Estate Tax Repeal: Windfall for the Wealthiest
The House is expected to consider a bill this week to repeal the federal estate tax on inherited wealth. This proposal would significantly increase budget deficits, widen wealth inequality, and benefit only the wealthiest Americans. And it comes just after House and Senate Republicans approved budgets that would make $5 trillion in budget cuts over ten years, with more than two-thirds of the cuts coming from programs focused on Americans with low or modest incomes.
Only the estates of the wealthiest 2 of every 1,000 people who die will owe the estate tax in 2015 under current law, largely because of its very generous tax-free exemption levels. The estate tax's reach is limited to the biggest estates.
Under repeal, the roughly 5,400 estates that would otherwise owe any tax in 2016 would get a tax cut averaging more than $3 million apiece, Joint Committee on Taxation (JCT) data show. The estimated 320 estates worth at least $50 million would receive tax windfalls averaging more than $20 million each.
The repeal bill also would leave in place a loophole in the capital-gains tax. Consider estates that are worth more than $100 million. More than half of their assets are in the form of unrealized — and untaxed — capital gains. Normally, capital gains are taxed when they are realized, but those who inherit these assets are given a "stepped-up basis," meaning that they are taxed only on gains that occur after the original owner died — and the gains that occurred earlier are never taxed at all. With estate tax repeal, wealthy individuals would be able to pass such assets along to succeeding generations without the gains ever having been subject to any tax.
The repeal bill is part of a long push by a well-organized, well-financed lobby to cut taxes on the wealthiest estates. Over the past two decades, policymakers have increased the amount of an estate that's exempt from the tax from $650,000 in 2001 to $5.43 million per individual (and $10.86 million per married couple), and cut the top tax rate from 55 percent to 40 percent.
And the effective rate of the tax — the portion of the value of a taxable estate that is actually paid in tax — is much lower than the top rate. The few estates that are taxable at all paid taxes equal to 16.6 percent of the estates' value, on average, in 2013. That's because of the high exemption level, coupled with provisions to protect farmers and small businesses and complex estate-planning methods that many wealthy estates use to reduce their tax liability.
Still, the estate tax is an important source of revenue for the federal government, raising funds for essential programs from health care to education to national defense. Repealing the tax would cost $269 billion in lost revenues from 2016 to 2025, according to JCT. The House legislation doesn't offset this cost; it just adds it to the deficit.
The estate-tax repeal proposal comes just after House and Senate Republicans passed budget resolutions that would make it harder for low-income people to secure adequate food for their families, for working-class children to afford to go to college, and for millions of Americans to afford to go to the doctor.
The proposed estate-tax repeal and the proposed budget cuts also come at a time when income and wealth in America have grown increasingly concentrated at the top. The wealthiest 0.1 percent of families — the main beneficiaries of estate-tax repeal — saw their share of the nation's wealth jump from 7 percent to 22 percent between 1978 and 2012. Large inheritances play a significant role in this wealth concentration, as they account for about 40 percent of all household wealth.
Estate-tax opponents have relied on two unsound arguments to make their case.
First, they argue that the estate tax threatens family-owned small businesses and small farms. But due to the generous exemptions already in law, only roughly 20 small businesses and small-farm estates in the entire United States owed any estate tax in 2013, according to the Tax Policy Center.
Second, estate-tax opponents argue that the estate tax hurts the economy. Yet the evidence indicates that the estate tax is economically sound. Rather, it is repealing the tax that would likely affect the economy adversely over time, because repeal would increase the deficit and thereby reduce the pool of saving available for private investment. (This would occur because a larger share of the nation's saving would have to go to finance the enlarged deficit.) Research also underscores that repeal would likely lead some wealthy heirs to work less.
Policymakers should reject legislation that would swell deficits and deepen inequality while providing no benefit to the vast majority of Americans.
Chuck Marr is the director of federal tax policy at the Center on Budget and Policy Priorities.