Out of every 1,000 Americans who die, only two pay the federal estate tax, which brought in $18 billion, or less than 1 percent of U.S. tax revenue, in 2016. It's remarkable, then, that such a minor tax has become a major partisan battleground. Republicans have long sought to repeal what they call the "death tax," arguing that it amounts to double taxation and an unfair burden on family-owned businesses and farms. Democrats decry the tax's erosion over recent decades as a giveaway to the richest Americans at a time of surging wealth inequality.
The tax overhaul that President Donald Trump signed into law in late December doubled the amount of wealth that escapes the 40 percent estate tax. Starting in 2018, the new law exempts about $11 million for individuals and $22 million for couples (the exact amount depends on the inflation adjustment), but only until 2026, when the thresholds will revert back. Even before the doubling of the exemption, so much wealth could be sheltered that the actual rate estates paid in 2016 was only about 17 percent, Internal Revenue Service data show. Rich Americans can use numerous strategies to make their estates look smaller before they die, with the help of an industry of estate planners who specialize in siphoning money out of estates and into trusts for future generations. Perhaps the easiest way to avoid the estate tax is to give to charity, causing many nonprofits to worry about the effect of estate-tax changes on their fundraising.
The U.S. first experimented with taxing inheritances during the Civil War. The modern estate tax has been on the books since 1916, though not without interruption. Under former President George W. Bush, a Republican, Congress passed a law to gradually phase out the tax. It disappeared for a year, in 2010, but then a deal between President Barack Obama and congressional Republicans restored the tax in 2011 with higher exemption amounts, adjusted for inflation each year. In polls, most Americans say they dislike estate taxes but also say they favor taxing wealthy people more. Though repealing the tax remains a goal for many Republicans, some of the party's senators have expressed skepticism about making it a priority, especially after Steven Mnuchin, the U.S. Treasury secretary, conceded that ending the tax would "disproportionately help rich people." There's little agreement globally on how and whether to tax estates: Japan, Germany and the U.K. all have estate or inheritance taxes, for instance. Australia has neither, while Canada taxes heirs on the fair-market value of inherited assets. Sweden abolished its tax in 2004 because it was preventing family businesses from being passed to the next generation.
The estate tax has taken on far more symbolic meaning (to both sides) than the amount of money at stake. Republicans often cite the experiences of family businesses that must be sold to pay the tax, but automatic exemptions and the ability to create sheltering trusts make those increasingly mythical. Wealthy people who own large, successful companies do have reason to worry about how their heirs will pay the tax and complain that the levy amounts to unfair double taxation — once when they're alive and again when they die. That can happen, though a 2013 Federal Reserve study estimated that 55 percent of the value of estates larger than $100 million consists of capital gains that have never been taxed — and may never be. The heirs of a family home, for example, are taxed on the gain in value after they inherited it, and only then when they sell it. Democrats say the tax preserves the American preference for merit over privilege, and that President Trump's companies are the kinds of family-owned businesses that Republican plans would mostly help. Other defenders of the tax say it's a needed bulwark against transmitting wealth inequality to the next generation. Instead of repealing the tax, Congress should close the loopholes that make it easy for the wealthy to avoid paying it, they argue. New York University law professor Lily Batchelder, a former Obama adviser, has proposed switching from taxing the estates of dead benefactors to taxing the inheritances of living heirs, who currently don't pay tax on what they receive. This would create incentives to break up dynastic wealth because recipients would pay taxes at their lower, ordinary income-tax rates.
Zachary Mider contributed to the original version of this article.
First published Jan.
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