Paul L. Caron

Thursday, October 31, 2019

Aaron: An Inheritance Tax Is Preferable To Wealth Or Estate Taxes

New York Times op-ed:  Rich Kids Can Spare Some of Their Inheritance, by Henry Aaron (Brookings Institution): 

A tax on inherited money or property — unlike wealth or estate taxes — would be hard for even the fanciest accountants to shake.

In America, if you play by the rules, working to earn a living and saving to provide for the future, taxes take a piece of your earnings. If you win a state lottery, you owe tax. But if you get lucky in the lottery of life and land an inheritance, you owe no federal tax. That isn’t fair, is it? Extending the federal tax code to include inheritances would end that inequity. Inheritance taxes — regulated differently in the states that have them — are a levy paid by a person who inherits money or property of a person who has died.

Extreme inequality is troubling both because it fosters gross and wasteful consumption and because it undermines the principle of political equality: Nearly unencumbered transfers of wealth permitted under current law perpetuate those imbalances, creating dynasties of the rich and hampering economic and social mobility.

“Ah,” you may be thinking, “Don’t we have an estate tax to break up wealth dynasties?” We had one once. But now it arguably exist only in name. ...

Two Democratic presidential candidates have proposals to curb wealth concentration. ... Despite vigorous advocacy by these two candidates, the chances of enacting and — of equal importance — sustaining either tax long-term is poor. ...

Fortunately, there is an alternative: an inheritance tax. This is how it would work: Cumulative inheritances (over a lifetime exempt amount), plus gifts (over an annual exempt amount), would be taxed. The rate would be the heir’s personal income tax rate plus a surtax, or some flat percentage, whichever is greater.

Preliminary estimates by the Urban-Brookings Tax Policy Center indicate that a tax on cumulative inheritances in excess of $1.5 million plus annual gifts in excess of $16,000, levied either at a rate of 35 percent or at the recipient’s income tax rate plus 15 percent (whichever is higher) would yield more than $600 billion between 2022 and 2030. That yield is 2.5 times greater than the estate tax is estimated to yield if the exemptions introduced by the 2017 tax cuts remain in place after 2025. If inheritances above $1 million were included and the minimum tax rate was 40 percent, the yield would be nearly $1 trillion.

Critics of an inheritance tax might respond that the person who gave you the inheritance already paid taxes on it. But that just isn’t so for most bequeathed property.

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An inheritance tax strikes me as a fine idea. At the same time, there's a simpler way of getting to the same place, i.e., fairer taxes.

Congress should eliminate the stepped-up basis, a tax code provision that allows assets to be re-priced when they're passed on. In this way, inheritors pay no capital gains taxes on unrealized gains in stock prices, real estate prices, etc.

The price when they're inherited becomes the new basis price. All of the unrealized gains, which haven't been taxed, never will be. It's a boondoggle that needs to be ended, period

Posted by: Gerald Scorse | Oct 31, 2019 5:52:46 AM

Families are more like corporations, and to tax at the death of a single member of that family is basically unfair, giving government a second bite at the apple, so to speak. Do we impose another level of tax on corporations when they have a change in CEO's? All of these death/inheritance/estate taxes are inherently unfair.

Posted by: ruralcounsel | Nov 1, 2019 3:39:24 AM

‘the person who gave you the inheritance already paid taxes on it. But that just isn’t so for most bequeathed property‘

Really? If so can’t they exempt wealth already taxed? Or they don’t really care and just want an excuse to give politicians more money to control.

Posted by: S Adams | Nov 3, 2019 3:57:09 PM