Repealing the Federal Estate Tax Would Increase Inequality and Cost Billions in Revenue

| | Bookmark and Share

With united Republican control of the White House and Congress, 2017 may be a year that ushers in huge tax cuts for the wealthy and corporations. Both President-elect Trump and congressional Republicans have released plans for comprehensive tax reform, and one of the many areas where the two plans agree is repealing the estate tax. Such legislation would widen wealth inequality and persistent deficits.

Researchers have estimated that the wealthiest 1 percent of Americans hold 42 percent of the nation’s wealth, up from 28 percent in 1989. The estate tax works to mitigate inequality by ensuring that large accumulations of wealth aren’t passed from generation to generation without being taxed. There is no good reason an inheritance should result in a tax-free windfall to heirs while people who earn their wealth are taxed in full.

Eliminating the estate tax would compromise the government’s ability to make public investments that grow the economy and to fund public programs that combat poverty and inequality. The Joint Committee on Taxation estimated that repealing the estate tax would cost $269 billion over 10 years. The loss of this revenue (especially in combination with the slew of other tax cuts proposed by Trump and House Republicans) would likely mean cuts to programs that largely benefit low- and middle-income households, tax increases for those with lower ability to pay, increased federal deficits, or some combination of the three.

As one of the nation’s most progressive revenue sources, the estate tax affects only the wealthiest estates. ITEP’s new report shows that in 2015, the tax was levied on only 0.2 percent of all estates. This means that of the deaths that occurred in 2014, 99.8 percent resulted in no federal estate tax liability in 2015 (estate taxes are generally paid in the year after death). The report also shows that the portion of estates subject to the federal estate tax in most states was 0.1 to 0.2 percent in 2015, with the highest being 0.4 percent in California. While the tax historically applied to 1 to 2 percent of estates on average (and in some years above 5 percent), legislative actions increasing the exempted amount of an estate’s wealth have led to the tax having a far narrower reach in recent years. Under current law, estates with a value of less than $5.45 million (or $10.9 million for married couples) won’t owe a penny in estate tax for 2016. In contrast, the exemption throughout most of the 1990s was $600,000 per spouse.

Even though the estate tax affects so few people, supporters of its repeal claim that the tax has disastrous effects on the economy and on people inheriting small family farms or businesses. These claims are tenuous at best. There is no consensus among economists that the estate tax harms the economy, very few small farms and businesses are touched by the tax, and the law contains provisions to minimize any hardship on those farms and businesses that do owe tax. The argument that the tax constitutes double taxation (because the deceased owners of estates already paid income and payroll taxes) is also weak, considering that a large portion of the estates subject to the tax is comprised of unrealized capital gains that have never been taxed. Due to a loophole in the income tax code known as “stepped-up basis,” no income tax is ever paid on the increase in value of assets that are held until death. Without the estate tax, large amounts of capital would go completely untaxed.

Instead of repealing the estate tax, it should be strengthened in order to raise additional revenue and prevent further increases in wealth inequality. Both President Obama and Senator Bernie Sanders have put forth proposals to restore the exemption level in effect in 2009 ($3.5 million per spouse) and to increase the top rate. The President’s proposal would raise $161 billion over 10 years, and Senator Sanders’ bill would likely raise more because he proposes graduated rates ranging from 40 to 60 percent, depending on the size of the estate.

In the near term, efforts will likely need to be focused on protecting the current estate tax from complete repeal. Another critical area for reform, especially if the estate tax is repealed, is closing the stepped-up basis loophole. The estate tax serves as a backstop to the income taxes that are avoided because of this rule. In the unfortunate but increasingly likely case that the estate tax is repealed, closing this loophole (by taxing capital gains at death) will become all the more important.

For additional information on the estate tax, see ITEP’s new report “The Federal Estate Tax: A Critical and Highly Progressive Revenue Source” or our related one-page fact sheet “Preserving the Estate Tax.”

Tax Justice Digest: Bartering tax breaks for jobs, repatriation, tax breaks for seniors, and other state news

In the Tax Justice Digest we recap the latest reports, blog posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy. Here’s a rundown of what we’ve been working on lately.

About President-Elect Trump and Carrier Corp.’s 1,000-Jobs Deal
Where to start with this Carrier Corp. deal? Over a 15-year period, Carrier’s parent company paid an average 10 percent effective federal tax rate: that’s less than one-third of the statutory rate. To boot, the company likely is avoiding taxes on a $29 billion offshore cash hoard. In spite of this, the incoming Trump Administration has decided more tax breaks are a fair ransom for the company’s paper-thin promise to keep 1,000 jobs in the United States. ITEP Senior Fellow Matthew Gardner wrote two recent blog posts about this corporate claptrap.

Beyond the PR Spin: Carrier Corp. Holds American Jobs Hostage to Tax Breaks

A Few Things to Consider Before Giving Away the Store to Carrier Corp.

To learn more about how tax incentives for corporations primarily help corporations and their shareholders, read Tax Incentives: Costly for States, Drag on the Nation

Tax Cuts for the Rich Are the Main Feature, Not a Bug, of the Trump Tax Plan
Incoming Treasury Secretary Steven Mnuchin made waves this week with his announcement that the tax plan proposed by his boss, President-elect Donald Trump, will not cut taxes for the wealthy, promising “no absolute tax cut” for upper-income families. This statement flies in the face of every available analysis of Trump’s tax plan. Read Matt’s blog diving deeper into the details of Mnuchin’s statement and Trump’s tax proposals.

Taxing $2.5 Billion in Offshore Profits: What’s Ahead for Repatriation?
Multinational companies collectively are hoarding $2.5 trillion in profits offshore and avoiding up to $718 billion in U.S. taxes. Lawmakers on both sides of the aisle as well as the incoming Trump Administration view this offshore cash as low-hanging, revenue-producing fruit, and it is likely that lawmakers will come up with a plan this year to incentivize companies to “repatriate” this cash. Problem is that the proposals likely to gain traction are ill-advised, patchwork fixes. Read ITEP analyst Richard Phillips’ blog on repatriation, or if you have a few more minutes, read ITEP’s comprehensive guide to repatriation proposals.

We Count at Least Nine Problems with Trump’s Infrastructure Proposal
In theory, expanded investments in our nation’s infrastructure could generate wide support among the public and within Congress. Yet congressional negotiations on this issue have repeatedly broken down because of disagreements over how to fund those investments. Unfortunately, a flawed proposal for new funding put forth by President-elect Trump fails to offer a realistic path forward. Read ITEP’s new issue brief, Privatization, Waste, and Unfunded Projects: The Problems with Trump’s Infrastructure Proposal or read ITEP research director Carl Davis’s blog for a brief summary.

What Will Tax Reform Ultimately Look Like?
With something called “tax reform” moving full steam ahead in Congress, it not yet clear what exactly lawmakers mean by tax reform. Lawmakers are still struggling over fundamental questions such as whether tax reform should be revenue neutral and  bipartisan, and what the international tax system should look like. Read our blog exploring how these critical decisions might play out.



State Tax Breaks for the Elderly Primarily Benefit the Wealthy, Drain State Coffers
No one wants to be poor in their golden years, and this is a likely reason that state tax breaks for the elderly are popular in multiple states. But an updated ITEP research brief finds that all too often, tax breaks for the elderly are poorly targeted and primarily benefit wealthier taxpayers. Read ITEP analyst Aidan Davis’s blog summarizing the brief.

The Road Ahead for State Tax Policy in 2017
While state and local elections didn’t receive as much national media attention as the presidential race, shakeups in statehouses will pave the way for significant tax policy debates in a number of states. In a recent piece, ITEP staff outlines states to watch in 2017

State Rundown: Figuring out How to Fund Roads, Millionaire’s Tax, Etc.
This week’s State Rundown features news about transportation and infrastructure funding in Indiana, California, and South Carolina, next steps for New York‘s millionaire’s tax, moves toward comprehensive tax expenditure review in Ohio, continuation of the income tax reciprocity agreement between New Jersey and Pennsylvania, and efforts for tax change in Nebraska and Arkansas.


If you have any feedback on the Digest or tax stories you’re watching that we should check out too, please email me 

Sign up to receive the Tax Justice Digest 

For frequent updates find us on Twitter (CTJ/ITEP), Facebook (CTJ/ITEP), and at the Tax Justice blog.

Tax Cuts for the Rich Are the Main Feature, Not a Bug, of the Trump Tax Plan

| | Bookmark and Share

Incoming Treasury Secretary Steven Mnuchin made waves this week with his announcement that the tax plan proposed by his boss, President-elect Donald Trump, will not cut taxes for the wealthy, promising “no absolute tax cut” for upper-income families.

This statement flies in the face of every available analysis of Trump’s tax plan, from the truly huge high-end tax cuts Trump proposed during the 2015 primary battle to the trimmed-down high-end tax cuts he proposed earlier this fall. A September 2016 analysis by our partner organization Citizens for Tax Justice found that Trump’s plan would cut taxes for the best-off 1 percent of Americans by an average of over $88,000 if fully implemented in 2016. The CTJ analysis also showed that by any standard measure, the tax cuts going to the top 1 percent under the revised Trump plan would far exceed the cuts going to any other income group: the top group’s tax cut clocked in at 5.1 percent of that group’s personal income, more than double the tax break going to any other group. All of which is to say that giving an “absolute tax cut for the upper class” is the main feature of Trump’s plan—rather than, as Mnuchin implies, a bug to be fixed—and that only a complete rewrite of the Trump tax plan could possibly make Mnuchin’s claim true.

A comment from Trump advisor Stephen Moore suggests (disturbingly) that Mnuchin may have simply misunderstood, or mis-stated, the nuances of the Trump plan. Moore told the Wall Street Journal that Trump’s plan “was designed so that the [itemized] deduction cap offsets the revenue loss from lowering the top tax rate on ordinary income from 39.6% to 33%.” Of course, this seems like a pretty arbitrary goal: why seek to achieve revenue neutrality between two discrete provisions of the Trump plan if you’re then going to lard on an assortment of other high-end giveaways, from estate tax repeal to ending the alternative minimum tax?

Unfortunately for Moore, it turns out that his explanation doesn’t hold water either. A new ITEP microsimulation analysis shows that even if the Trump tax plan was limited to dropping the top tax rate and capping all itemized deductions in the way Trump has proposed, the best-off 1 percent would still see, as a group, tax cuts averaging over $12,400 in 2016. Which means that there is simply no way that Mnuchin’s statement can be seen as anything but a outright falsehood when applied to Trump’s September tax plan.

It is, of course, possible that Mnuchin’s statement reflects Trump’s intention to once again completely rework his tax plan in the runup to the 2017 legislative session. But prior revisions of the Trump plan have only pared back its cost, without meaningfully changing the tax fairness impact of the plan. Trump and his advisers have consistently failed to identify enough loophole-closers to pay for his proposed reductions in the personal and corporate income tax rates. This strategy of enthusiastically answering the easy questions and dodging the hard ones is sadly all too familiar to observers of tax politics.

Unless President-elect Trump is now willing to abandon core features of his plan, such as dropping the top tax rate to 33 percent or repealing the estate tax, Mnuchin’s comments must be seen as either an admission that the next Treasury Secretary has a poor grasp of the nuances of tax policy, or that Mnuchin isn’t especially wedded to the truth.