MÁS ALLÁ DE LOS NÚMEROS
Yet Another Estate Tax Cut on Massive Inheritances Is a Poor Choice
One of the many tax cuts Republicans are considering extending for the wealthy in their reconciliation bill is an estate tax cut for the country’s wealthiest, the latest in their decades-long effort to weaken this tax. This amounts to a $5.7 million tax cut for the wealthiest 1 in 1,000 estates in the country, whose value consists largely of unrealized capital gains income that has never been taxed.
In 2017 the estate tax already applied to only the highest-value estates — only amounts above $11 million per couple were taxable — when Republicans doubled this exemption to $22 million. Indexed for inflation, it’s now around $28 million tax free.
Even as people with low incomes and few opportunities face massive cuts to vital health care and food assistance under current Republican proposals, the wealthiest are seeing these same policymakers double down on this costly estate tax break, with some Republicans even calling for the tax’s permanent repeal. Policymakers should instead allow the exemption to revert to prior levels and focus their attention on closing the tax’s massive loopholes, which many of the nation’s wealthiest use to pass billions of dollars on tax free to their heirs.
When considering how estates of very wealthy people should be taxed, it is important to consider how much they have benefitted from the government and living in the United States. For example, today’s tech titans benefit tremendously from Department of Defense and National Science Foundation investments in developing the internet.
There is a stark double standard in the taxation of very wealthy people’s financial assets as compared to those held by the middle class, which are far more modest.
- Today the wealthiest people in the country often go through life without paying income tax on much or any of their income each year, or ever. They hire accountants to hold their financial assets in complex trusts. When they die, their income tax liability on that income is erased and the trusts allow their heirs to escape much, if not all, of the estate tax. And heirs don’t pay a dime of income taxes on massive inheritances. Put it all together and massive sums accrued over a lifetime may never face any tax.
- In contrast, when a middle-class person with a retirement account like a 401(k) turns 73, they must begin taking mandatory distributions — in part so they can’t use their accounts as tax shelters. If they die with an account balance and leave it to a family member or another heir (other than a spouse), the heir must liquidate the account within ten years and pay individual income tax on those distributions.
Retirement accounts offer generous tax advantages that allow middle-class people to build up their accounts leading up to retirement, but eventually either the account holder or an heir must pay income tax on any accrued gains. As they should.
But for some of the main assets of wealthy people, it’s very different. Tax bills over the last 30 years have prioritized weakening the taxation of massive inheritances, in response to a concerted push from some of the wealthiest families in the country. Primarily Republican policymakers pressed for a significant loosening and even elimination of the estate tax starting with the 1994 policy agenda known as the Contract with America, the bipartisan 1997 Balanced Budget Agreement, the 2001 Bush tax cuts and 2013 fiscal cliff deal (which extended certain expiring tax cuts enacted in 2001 and modified others), and the 2017 tax law, which dramatically cut taxes for very large estates.
Extending the 2017 law’s estate tax cut in the upcoming tax bill would deliver a $5.7 million tax cut to the wealthiest in the country — a tax cut that is 170 times the annual income of a family of four just at the poverty line. (The estate tax’s 40 percent rate, applied to the extra $14.28 million exemption in 2026, yields $5.7 million.) Rejecting this extension should be uncontroversial; instead House Republicans have called for massive cuts to health coverage through Medicaid, food assistance through SNAP, and student loans to help pay for this and other tax cuts highly skewed to the wealthy.
Policymakers can and should do more to bolster the estate tax, namely by closing its loopholes.
For example, many very wealthy people use what are called grantor retained annuity trusts (GRATs) to shelter funds from the estate tax. Under this tax break, a wealthy individual puts high-growth assets, typically stock, into a trust designed to repay the estate the initial amount plus interest at a rate set by the Treasury, typically over two years. If the assets’ value rises any more than the Treasury rate, the gain goes to the heir tax free. If the investment doesn’t gain value, the full amount still goes back to the estate. Such techniques have been described as a “heads I win, tails we tie” bet.
Casino owner and GOP donor Sheldon Adelson, who died in 2021, passed $7.9 billion to his heirs tax free “by shuffling his company stock in and out of more than 30 trusts.” He is not alone. ProPublica has reported that over half of the 100 richest people in the country take advantage of the GRAT loophole.
The IRS doesn’t know how much money these tax shelter trust funds contain because trusts aren’t required to report their asset amounts. Congress should require this information to be reported, as the Biden Administration’s budgets proposed. This would help lawmakers and the public understand exactly how much tax the country’s wealthiest households are avoiding by exploiting these estate tax loopholes.
Ending them altogether could raise substantial revenue to help finance worthwhile tax cuts for families, like an expanded Child Tax Credit, or other investments in areas like housing. Instead, congressional Republicans seem poised to do nearly the reverse — like cutting health care and food assistance for millions of people to finance still more tax cuts for the wealthy.
