From Class to Caste: How Congress Is Set to Accelerate Inequality by Repealing the Estate Tax
This week the Republican-controlled House of Representatives plans to pass legislation that would accelerate inequality ensuring today’s merely wealthy become tomorrow’s obscenely rich.
Those who want to repeal the estate tax have labeled it “the death tax,” but they couldn’t be further from the truth. More than 99.8 percent of Americans who inherit money or property from a loved one get a big tax break. Only one in five members of the top 1 percent pays any estate tax. And those fortunate few who have enough wealth to be subject to the tax pay less than two dimes in tax on every dollar in the estate.
This repeal contrasts greatly with the views our country was built on. A century ago, our ancestors faced the greatest economic inequality in the country’s history. Technological change in the 19th century led to the rise of great railroad and industrial fortunes. In order to avoid the aristocratic wealth that the founders of our country abhorred and left behind in Europe, Congress passed an estate tax in 1916.
Today, the great technological advances of the late 20th century have allowed wealth to both explode and to concentrate. Yet today’s Congress appears poised to repeal the estate tax and further accelerate inequality and hurt lower- and middle-class Americans.
Contrary to conservative mythology, 998 of every 1,000 estates get a tax break at the time of death. Here’s how that works. When a family member dies, all of the accrued capital gains taxes on things the person owned at the time of their death – a home, a stock portfolio, jewelry, collectibles – are forgiven. Their heirs receive their inheritance tax-free. They don’t even declare that money as income on their income tax return.
Say your grandmother bought her house 50 years ago and paid $15,000 back then. Today, that house is worth $200,000. If she sold it the day before she died, she would have had to pay capital gains taxes of $37,000 (20 percent tax rate) on the $185,000 increase in value. But at the time of death, every investment the person owned is revalued for tax purposes as of the date of death. So if you inherit the house and decide to sell it, its tax value is $200,000 and you would owe no capital gains taxes. This tax rule saved your family $37,000.
Everyone gets this tax break, called the stepped-up basis, including the richest Americans. But to make certain that unlimited amounts of wealth don’t pass from generation to generation, the wealthiest 0.2 percent of Americans – two out of every 1,000 Americans who die each year – pay an estate tax on amounts over $10.8 million per married couple ($5.4 million per individual). In 2013, that tax averaged 16.6 percent of the value of the estate after all exemptions and deductions were taken.
The estate tax was sharply cut in 2003. Before that, couples with more than $1.3 million ($650,000 for single people) owed the tax – and ten times as many estates paid the tax as do today.
If Congress votes to eliminate the estate tax, vast amounts of money that has never been taxed will be passed tax-free to the heirs of today’s billionaires. Imagine Mark Zuckerberg, founder of Facebook, whose company stock is valued for tax purposes at pennies a share. None of Zuckerberg’s fabulous stock gains have yet been taxed. If he sold all of this stock today, Zuckerberg would owe capital gains taxes of close to $8 billion. He would still have more money than anyone could use in several lifetimes. If the estate tax were eliminated and all accrued but unpaid capital gains taxes were forgiven, $40 billion of untaxed stock-based wealth would be passed to heirs tax-free.
And if those heirs took their huge inheritances and invested them in portfolios that they didn’t touch during their lives, all of their capital gains taxes would be forgiven when they died, and their heirs would inherit still larger fortunes. Congress is on the path to creating a permanent class of Americans who never have to work or pay taxes.
If Congress eliminates the estate tax, America will move closer to becoming an aristocracy of inherited wealth where your lot in life will be determined more by the family you were born into, instead of your hard work and creativity.