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At a time of growing wealth and income inequality, House Republicans seem to be on a warpath to use tax policy to accelerate this trend.
The House Ways and Means Committee passed a bill on Wednesday that would repeal the estate tax. The bill’s passage is an incremental victory for the wealthy and their allies who, for years, have been trying to outright repeal the tax. The bill’s proponents have been falsely touting estate tax repeal as necessary to keep small businesses and family farms in operation, but the truth is that the bill is a giveaway to the richest of the rich. Only a fraction of the top one percent of the population are even subject to the tax.
Earlier this year, the GOP made a big hullabaloo over talking more about poverty and income inequality. But this bill and the just-passed House budget prove lawmakers are more interested in talk about inequality for political purposes, but action only when it comes to the whims of the super rich. Given that the estate tax is a critical bulwark against wealth inequality, it’s absurd that Congress would even consider weakening the tax when they should be working to strengthen it.
For those representatives who need a review, here are the three principal reasons we should make the estate tax more robust:
1. The estate tax is one of our nation’s most progressive revenue sources. The latest data from the IRS show that less than 4,700 estates (or the richest 0.18 percent all of estates) owed any estate tax whatsoever in 2013. Put another way, repealing the federal estate tax would do nothing for 99.82 percent of estates that already do not owe a penny in federal estate taxes.
Lowering taxes for this tiniest sliver of the ultra wealthy makes even less sense given the extreme rise in their overall wealth in recent years. For example, a recent study found that the top 0.1 percent of Americans already own more than 20 percent of all wealth in America, a level of wealth inequality that has not been seen in America since the late 1920s.
Opponents of the estate tax frequently cite its alleged effect on family-owned “small” businesses and farms. This is a red herring, plain and simple. According to estimates, only about 20 small business or farm estates owed anything in estate taxes in 2013. Even for those few small businesses or farms that owe estate taxes, there are already generous rules allowing those taxes to be paid over a 15-year period.
2. The estate tax is an important complement to our income tax system. Inherited wealth is one of the only forms of income that is entirely excluded from income taxation. In testimony before the House Ways and Means Committee, law professor Ray Madoff noted this inequity by pointing out that a person earning $60,000 could owe $15,627 in income taxes, while someone inheriting $60,000, even from a distant relative, owes nothing in taxes on that income. The estate tax makes up for this inequity (for wealthy estates at least) by applying a tax to the estate as a whole before it is then distributed to its inheritors.
In addition, without the estate tax, a substantial portion of income would go entirely untaxed at any point under the current system due to the “stepped up basis” rule. Under this rule, capital gains income on assets that are not sold during the owner’s lifetime are never subject to any tax. Congress should end this tax shelter as President Obama proposed to do in his latest budget.
Under the current system, the estate tax at least ensures that some tax is paid on capital gains for the wealthiest estates. For estates worth more than $100 million for example, these unrealized capital gains constitute 55 percent of their value.
3. The estate tax is a critical source of federal revenue. According to the nonpartisan Joint Committee on Taxation, repealing the estate tax would cost the federal government as much as $268 billion in revenue over the next ten years. This loss of revenue would likely mean even more cuts to crucial public investments, a further increase in our nation’s deficit or increasing taxes on individuals with lesser ability to pay.
If anything, Congress should raise more revenue by passing President Obama’s proposals to end the many egregious loopholes (including the infamous GRAT loophole) in the estate tax and restore the exemption level to $3.5 million dollars. Taken together, Obama’s proposals would raise another $214 billion over the next 10 years and would likely result in no additional taxes owed for 99.7 percent of estates.