A specter is haunting America's super-rich — the specter of progressive taxation.
Don't worry, though, the Republican Party is manning the barricades against this menace. That's been true for the last 35 years, and it's no less so now. Indeed, the Paul Ryan-led House Ways and Means Committee just symbolically voted to end the estate tax entirely. In other words, to stand in solidarity with the heirs of the top 0.2 percent.
That's how many households pay the estate tax now: 2 out of 1,000. Why so low? Well, the first $5.43 million that an individual or $10.86 million that a couple leaves behind isn't taxed when they pass away. The estate tax, with its 40 percent top rate, only kicks in for anything more than that. And even then, creative accountants and big deductions can shield a lot of the rest from Uncle Sam. So it's important to remember that there's a difference between the top marginal tax rate and the effective tax rate that estates pay. Since the super-rich only owe the estate tax on some of what they own, they actually pay, on average, 16.6 percent of the value of their estate. Republicans like to say that this is still too big a burden on small businesses and family-owned farms, but the reality, as the Center on Budget and Policy Priorities points out, is that only 20 of them—in total—owed any estate tax in 2013, and then at just an average rate of 4.9 percent.
But that, Republicans say, is still 4.9 percent or 16.6 percent or however else too much, because they think the estate tax is a double tax. Assets get taxed once as income, the story goes, and then again as part of the estate. So getting rid of the estate tax would supposedly make things fairer, and give the uber-rich even more reason to save—which should, yes, trickle down to everyone else. Hey, it's not like those yachts are going to clean themselves. Now there's a very small amount of truth to this, but only that. Economists estimate that the economy would be slightly—0.1 to 0.6 percent—bigger if there weren't any estate tax, but that assumes that the government would either replace the lost revenue or cut spending. If it didn't, GDP wouldn't go up at all.
The bigger problem, though, is that a lot of times the estate tax isn't a double tax. That's because of a loophole called "step-up basis" that lets heirs avoid paying any tax on some capital gains. Here's how it works. Suppose you bought $1 million of stocks that become worth $10 million by the time you pass away. That's a $9 million capital gain you'd owe tax on, which, at the 23.8 percent rate, works out to about $2 million for the IRS. But—here's the magic—you can make that capital gain disappear from the government's point-of-view if you don't sell your stock and leave it to your kids instead. Why? Because the capital gain your heirs are taxed on isn't based on the original price, or basis, you bought it at, but rather the new price that they inherited it at. So, in this case, your kids would only owe taxes, whenever they sell the stock, on any gains above $10 million—and your $9 million gain before that would go untaxed. Now in theory, you could get rid of the estate tax, and, as long as you also got rid of step-up basis, it at least wouldn't be a massive giveaway to the top 0.2 percent. But that's not the Republican plan. They don't want to tax heirs at all: neither an estate tax nor step-up basis. In other words, a $246 billion gift to the Paris Hiltons of the world over the next decade.
At a time when wealth inequality is already at a 70-year high, that'd really be heightening the contradictions.