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Matt O’Brien: If it weren’t for the estate tax, the majority of the superwealthy’s money would never be taxed

By Matt O’Brien Washington Post

There are bad arguments, there are unconvincing arguments, and then there are arguments against the estate tax. Those deserve their own category of ignominy.

The best of them, after all, is based on what is largely a falsehood. That’s the idea that the estate tax is inherently unfair because it taxes money that’s already been taxed. You have to pay Uncle Sam, the story goes, first when you make your money, and then again when you leave it to your heirs (if, that is, you have more than the $22.4 million that’s exempt). Now, insofar as injustices go, this would certainly be far, far down the list, even if we were only talking about tax policy. But that’s assuming that it’s even true. It’s not, though, in a lot of cases. As the left-leaning Center on Budget and Policy Priorities points out, 55 percent of the assets held by households worth $100 million or more haven’t actually been taxed before being subject to the estate tax.

Let’s repeat that for emphasis: If it weren’t for the estate tax, the majority of the super-rich’s money would never be taxed at all.

How is this possible? The answer has to do with how we do – and don’t – tax capital gains. The first thing to understand is that any increase in the value of your stocks, bonds or real estate is taxed only when you sell them. But what if you don’t? What if you just hold on to them, and eventually pass them on to your kids instead? In that case you – or, more accurately, they – stand to benefit from one of the biggest loopholes in the entire tax code. The way it works is that it’s not your gains that are taxed, but rather theirs.

Let’s say you had stock that went from being worth $10 million when you bought it to $100 million by the time you left it to your children. Your heirs wouldn’t owe any capital gains tax on that original $90 million increase – which you also didn’t pay any on – but only on any subsequent increases. This is what’s known as “stepped-up basis” and, as you could probably guess, it overwhelmingly benefits the rich. The nonpartisan Congressional Budget Office, for its part, estimates that the top 1 percent receive 21 percent of its total money from it, with the next 9 percent getting 34 percent themselves.

This goes a long way toward explaining why the estate tax has become an object of such intense political conflict even though only 0.2 percent of households pay it. Indeed, despite what you may have heard about how it doesn’t really matter since the super-rich can just hire an army of lawyers and accountants to avoid it, the estate tax is actually the only one that a lot of these dynastically wealthy families do pay on the bulk of their fortunes – and so getting rid of it is their top priority. One Republican donor actually went so far as to call this “the linchpin of the conservative movement,” which is as depressing a commentary you’ll find on the influence of money in politics. All of which is to say that it should be no surprise that Republicans are once again proposing to eliminate the tax entirely. Of course, letting billionaires pass on most of their money without ever paying any taxes on it isn’t exactly the most popular of ideas, so Republicans tend to couch this as a matter of defending family farms from being broken up by the alleged depredations of Uncle Sam. Never mind that only 80 small farms or small businesses owed any estate tax in 2017 – 1.4 percent of the total of everyone who did – for an average of just 6 percent of their respective values.

Now, it’s equally easy to see why Democrats want to go in the opposite direction and raise the estate tax quite a bit. Somewhere between 40 and 60 percent of private wealth is now inherited in this country, so taxing it some more seems like a good first place to start raising the revenue we need to pay for the government that voters want. Besides, it’s not like that’s going to change the incentive to be born into a billionaire’s family. Which is why Sen. Bernie Sanders, I-Vt., has proposed raising the top estate tax rate for the Davos class from the 40 percent it is to the 77 percent it used to be. (Oligarchs of more modest means would pay a lower rate.)

The difference between the parties really couldn’t be more stark. At a time when the costs of college, housing and health care are skyrocketing, middle-class incomes are stagnating, and average life spans are declining, Republicans are focused on … trying to make most inherited money be tax-free? Actually, yes. Democrats, meanwhile, want to tax the winners of our birth lottery as FDR did, both to help pay for the programs that people need and to try to prevent our society from turning into a rigid caste system. It’s the difference between a new Gilded Age and a new New Deal.

But that’s not the argument that Republicans, or President Donald Trump in particular, want to have.

Matt O’Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at the Atlantic.

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