In America, if you play by the rules, working to earn a living and saving to provide for the future, taxes take a piece of your earnings. If you win a state lottery, you owe tax. But if you get lucky in the lottery of life and land an inheritance, you owe no federal tax. That isn’t fair, is it? Extending the federal tax code to include inheritances would end that inequity. Inheritance taxes — regulated differently in the states that have them — are a levy paid by a person who inherits money or property of a person who has died.
Extreme inequality is troubling both because it fosters gross and wasteful consumption and because it undermines the principle of political equality: Nearly unencumbered transfers of wealth permitted under current law perpetuate those imbalances, creating dynasties of the rich and hampering economic and social mobility.
“Ah,” you may be thinking, “Don’t we have an estate tax to break up wealth dynasties?” We had one once. But now it arguably exist only in name.
As recently as 1976 the estate tax applied to more than 7 percent of all descendants at a top rate of 70 percent. In 2019, however, just 0.07 percent of all descendants will owe any estate tax, a 99 percent decrease. Successive increases in the estate tax exemption over the last political generation have let all but the wealthiest — and those who neglect to consult lawyers and accountants — escape estate tax almost entirely. Ed McCaffery, a law professor at the University of Southern California, has described it as being akin to a “voluntary tax.”
The latest increase in the estate tax exemption came in the 2017 Tax Cuts and Jobs Act. It doubled the already generous exemption to $22.8 million from $11.4 million for couples. Congress hid much of the long-term revenue loss from the 2017 law by scheduling many provisions, including the estate tax exemption increase, to expire in 2026. It is a good bet, however, that Congress will make the exemption increase permanent.
Two Democratic presidential candidates have proposals to curb wealth concentration. Senator Elizabeth Warren proposes an annual tax on net wealth — assets over $50 million would be taxed at 2 percent; assets assessed to be over $1 billion would face an extra 1 percent. Senator Bernie Sanders wants an even larger wealth tax, which he estimates would yield roughly twice as much revenue as Ms. Warren’s plan. Mr. Sanders also has a plan that would cut today’s estate tax exemption — to a still-generous $7 million for couples — and raise today’s flat 40 percent rate to a range of 45 percent to 77 percent, with the highest rate applicable only to the estates of billionaires.
Despite vigorous advocacy by these two candidates, the chances of enacting and — of equal importance — sustaining either tax long-term is poor.
A dozen or so countries used to have wealth taxes, although none at rates approaching those Ms. Warren and Mr. Sanders seek. And all but six countries have effectively abandoned them. One reason is that a broad wealth tax can work only if all or most assets of every potentially taxable person are valued every year. That is a Sisyphean task under the best of circumstances. It would be an impossible challenge in the United States, where chronically underfunded tax administrators are already unable to prevent hundreds of billions of income tax dollars from being lost each year to evasion.
Mr. Sanders’s proposal to reinvigorate the estate tax has many attractions. But the political obstacles are formidable. Opponents have successfully branded it a “death tax,” arousing primal instincts against adding an economic penalty to a time of emotional pain and loss. And so estate taxes continue to poll badly, even though an exceptional few people face them.
Fortunately, there is an alternative: an inheritance tax. This is how it would work: Cumulative inheritances (over a lifetime exempt amount), plus gifts (over an annual exempt amount), would be taxed. The rate would be the heir’s personal income tax rate plus a surtax, or some flat percentage, whichever is greater.
Preliminary estimates by the Urban-Brookings Tax Policy Center indicate that a tax on cumulative inheritances in excess of $1.5 million plus annual gifts in excess of $16,000, levied either at a rate of 35 percent or at the recipient’s income tax rate plus 15 percent (whichever is higher) would yield more than $600 billion between 2022 and 2030. That yield is 2.5 times greater than the estate tax is estimated to yield if the exemptions introduced by the 2017 tax cuts remain in place after 2025. If inheritances above $1 million were included and the minimum tax rate was 40 percent, the yield would be nearly $1 trillion.
Critics of an inheritance tax might respond that the person who gave you the inheritance already paid taxes on it. But that just isn’t so for most bequeathed property. According to data compiled by the Federal Reserve, most inheritances consist of gains on financial assets or on businesses that were never taxed and under current law never will be.
Another major advantage of this tax is that it creates an incentive to divide estates among multiple heirs by reducing tax liabilities. And for society, splitting estates modestly reduces the concentration of wealth — and of its attendant economic and political power — a primary goal of any of these reforms.
Taxing inheritances is not the only way to reduce wealth inequality. Increasing top-bracket income tax rates and ending the practice of taxing capital gains at lower rates than are applied to earned income are among other crucially needed reforms. So are measures that equalize pretax income, such as reducing the cost of college and other postsecondary training for people of modest means. But measures to narrow inequality in pretax incomes will take time to enact and even more time to take effect.
Meanwhile, a little help from an inheritance tax would be welcome. It would fit within our current income tax framework. It would be seen as fair. And it could not reasonably be cast as a death tax.
Henry Aaron is a senior fellow in the economic studies Program at the Brookings Institution.
The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: [email protected].
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Home » Analysis & Comment » Opinion | Rich Kids Can Spare Some of Their Inheritance
Opinion | Rich Kids Can Spare Some of Their Inheritance
In America, if you play by the rules, working to earn a living and saving to provide for the future, taxes take a piece of your earnings. If you win a state lottery, you owe tax. But if you get lucky in the lottery of life and land an inheritance, you owe no federal tax. That isn’t fair, is it? Extending the federal tax code to include inheritances would end that inequity. Inheritance taxes — regulated differently in the states that have them — are a levy paid by a person who inherits money or property of a person who has died.
Extreme inequality is troubling both because it fosters gross and wasteful consumption and because it undermines the principle of political equality: Nearly unencumbered transfers of wealth permitted under current law perpetuate those imbalances, creating dynasties of the rich and hampering economic and social mobility.
“Ah,” you may be thinking, “Don’t we have an estate tax to break up wealth dynasties?” We had one once. But now it arguably exist only in name.
As recently as 1976 the estate tax applied to more than 7 percent of all descendants at a top rate of 70 percent. In 2019, however, just 0.07 percent of all descendants will owe any estate tax, a 99 percent decrease. Successive increases in the estate tax exemption over the last political generation have let all but the wealthiest — and those who neglect to consult lawyers and accountants — escape estate tax almost entirely. Ed McCaffery, a law professor at the University of Southern California, has described it as being akin to a “voluntary tax.”
The latest increase in the estate tax exemption came in the 2017 Tax Cuts and Jobs Act. It doubled the already generous exemption to $22.8 million from $11.4 million for couples. Congress hid much of the long-term revenue loss from the 2017 law by scheduling many provisions, including the estate tax exemption increase, to expire in 2026. It is a good bet, however, that Congress will make the exemption increase permanent.
Two Democratic presidential candidates have proposals to curb wealth concentration. Senator Elizabeth Warren proposes an annual tax on net wealth — assets over $50 million would be taxed at 2 percent; assets assessed to be over $1 billion would face an extra 1 percent. Senator Bernie Sanders wants an even larger wealth tax, which he estimates would yield roughly twice as much revenue as Ms. Warren’s plan. Mr. Sanders also has a plan that would cut today’s estate tax exemption — to a still-generous $7 million for couples — and raise today’s flat 40 percent rate to a range of 45 percent to 77 percent, with the highest rate applicable only to the estates of billionaires.
Despite vigorous advocacy by these two candidates, the chances of enacting and — of equal importance — sustaining either tax long-term is poor.
A dozen or so countries used to have wealth taxes, although none at rates approaching those Ms. Warren and Mr. Sanders seek. And all but six countries have effectively abandoned them. One reason is that a broad wealth tax can work only if all or most assets of every potentially taxable person are valued every year. That is a Sisyphean task under the best of circumstances. It would be an impossible challenge in the United States, where chronically underfunded tax administrators are already unable to prevent hundreds of billions of income tax dollars from being lost each year to evasion.
Mr. Sanders’s proposal to reinvigorate the estate tax has many attractions. But the political obstacles are formidable. Opponents have successfully branded it a “death tax,” arousing primal instincts against adding an economic penalty to a time of emotional pain and loss. And so estate taxes continue to poll badly, even though an exceptional few people face them.
Fortunately, there is an alternative: an inheritance tax. This is how it would work: Cumulative inheritances (over a lifetime exempt amount), plus gifts (over an annual exempt amount), would be taxed. The rate would be the heir’s personal income tax rate plus a surtax, or some flat percentage, whichever is greater.
Preliminary estimates by the Urban-Brookings Tax Policy Center indicate that a tax on cumulative inheritances in excess of $1.5 million plus annual gifts in excess of $16,000, levied either at a rate of 35 percent or at the recipient’s income tax rate plus 15 percent (whichever is higher) would yield more than $600 billion between 2022 and 2030. That yield is 2.5 times greater than the estate tax is estimated to yield if the exemptions introduced by the 2017 tax cuts remain in place after 2025. If inheritances above $1 million were included and the minimum tax rate was 40 percent, the yield would be nearly $1 trillion.
Critics of an inheritance tax might respond that the person who gave you the inheritance already paid taxes on it. But that just isn’t so for most bequeathed property. According to data compiled by the Federal Reserve, most inheritances consist of gains on financial assets or on businesses that were never taxed and under current law never will be.
Another major advantage of this tax is that it creates an incentive to divide estates among multiple heirs by reducing tax liabilities. And for society, splitting estates modestly reduces the concentration of wealth — and of its attendant economic and political power — a primary goal of any of these reforms.
Taxing inheritances is not the only way to reduce wealth inequality. Increasing top-bracket income tax rates and ending the practice of taxing capital gains at lower rates than are applied to earned income are among other crucially needed reforms. So are measures that equalize pretax income, such as reducing the cost of college and other postsecondary training for people of modest means. But measures to narrow inequality in pretax incomes will take time to enact and even more time to take effect.
Meanwhile, a little help from an inheritance tax would be welcome. It would fit within our current income tax framework. It would be seen as fair. And it could not reasonably be cast as a death tax.
Henry Aaron is a senior fellow in the economic studies Program at the Brookings Institution.
The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: [email protected].
Follow The New York Times Opinion section on Facebook, Twitter (@NYTopinion) and Instagram.
Source: Read Full Article