It’s not the most expensive piece of the new Republican tax plan, or the most economically consequential. But the single most galling aspect of the bill introduced today by Republicans in the House might be its repeal of the estate tax—a pointless sop to trust fund kids that will help ensure dynastic wealth continues stacking up in this country for years to come.
Republicans have long wanted to do away with the estate tax—they’ve successfully branded it as a “death tax” and perpetuated the myth that it threatens small family farms and mom-and-pop businesses. Today, thanks to their tireless efforts to narrow its reach, the government only touches the property of dead multi-millionaires; the first $5 million of an estate’s assets are exempt from the tax. Under the GOP’s new bill, that limit would rise to $10 million, indexed to inflation. Then the tax would disappear entirely in 2024. After that, Ivanka Trump won’t have to worry about paying the government when she inherits her father’s empire.
Killing the estate tax is an egregious move on its own. There is little to no economic rationale for it—some economists have argued the tax discourages savings by the wealthy on the margins and could hurt investment, but that’s not really much of a public policy concern when the capital markets are flooded with money. Meanwhile, nixing the tax will allow wealth to concentrate in the hands of the richest families while discouraging charitable bequests. It’s a win for the top 0.1 percent, at the expense of philanthropy and the federal budget.
But when you drill down to the specifics of the GOP’s plan, it looks even worse. While they do away with the estate tax, Republicans would leave in place the rules that currently spare heirs from paying capital gains taxes when they sell off the assets they inherit. Essentially, they’re turning death into a supercharged tax avoidance strategy for country’s most loaded families.
The issue here is a tax rule known as “stepped-up basis.” Let’s say your kindly aunt Karen bought some Apple stock in 1990 for a buck a share, then miraculously held onto it for a few decades. If she sold the stock last week, at $169 a share, she’d owe taxes on a $168 profit. But let’s say Karen passed away and left you the stock. You could sell it for $169, and pay no taxes. If you sold it for $171, you’d pay taxes on just a $2 profit. You aren’t held responsible for the capital gains taxes aunt Karen would have owed.
This system is somewhat tolerable today, since the estate tax captures a portion of the profits on appreciated assets. But with the estate tax gone, billionaires will be able to hold onto their stocks and bonds until they meet their maker, then pass them on entirely tax free to kids and grandkids.
This is how you build an aristocracy, one tax bill at a time.