The 2017 tax law doubles the estate tax exemption -- the value of estates that is exempt from the estate tax -- from
This doubling of the estate tax-free amount is a prime example of the 2017 tax law's three fundamental flaws: it is heavily tilted toward the wealthy, loses significant revenue, and makes it easier for wealthy people to game the tax system. Policymakers should not only repeal the estate tax cut but also strengthen the estate tax beyond its 2017 rules. At a minimum, they could restore the estate tax to the 2009 rules, when the exemption was about
Benefits Only Heirs of the
The 2017 tax law doubles the amount of an estate's value that's exempt from the estate tax, from
Reduce the share of estates facing the tax to fewer than 1 in 1,000. Even before the tax law was enacted, only the wealthiest 2 in 1,000 estates faced the estate tax. Policymakers have dramatically raised the exemption level in recent decades (from
See chart here (https://www.cbpp.org/research/federal-tax/2017-tax-law-weakens-estate-tax-benefiting-wealthiest-and-expanding-avoidance).
Give each of the 1,800 very largest estates a tax cut of
The estate tax is the most progressive part of the
Loses Much-Needed Revenue, Reflecting Flawed Priorities
The 2017 tax law will cost a total of
These large revenue losses are irresponsible given the fiscal challenges the nation will face over the next several decades, such as the aging of the population, health care costs likely continuing to rise faster than the economy, interest rates returning to more normal levels, potential national security threats, and challenges such as large infrastructure needs that cannot be deferred indefinitely. The nature and magnitude of these fiscal pressures will require revenue to rise as a percentage of gross domestic product to prevent an unsustainable rise in the nation's debt ratio over coming decades.
2017 Tax Law Kept Estate Tax Loophole
Wealthy Americans have only begun to explore the possibilities for gaming of the tax system that the weakening of the estate tax creates. A recent article in Tax Notes, for example, showed how the estate tax cut creates a potential avenue for wealthy Americans to reduce their capital gains taxes.(4)
Perhaps most significantly, the doubling of the estate tax exemption will allow vast sums of untaxed wealth to transfer to heirs. One reason wealth can go untaxed is the "stepped-up basis" loophole, which the 2017 tax law retained. Capital gains tax is due on the appreciation of assets, such as real estate or stock, only when the owner "realizes" the gain (usually by selling the asset). But the loophole allows someone who inherits an asset to not owe taxes on the appreciation of the asset that occurred during the previous owner's lifetime. Therefore, the increase in the value of an asset is never subject to income tax if the owner holds on to the asset until death -- unless they have to pay the estate tax on it.
These unrealized capital gains account for a significant proportion of the assets held by wealthy estates -- ranging from 32 percent for estates worth between
This problem of untaxed wealth transfers is compounded by the law's other gaming opportunities and an
Footnotes:
(1) For further information, see
(2)
(3)
(4)
(5) Curry 2018.
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