Just Taxes Blog by ITEP

Senator Sanders Proposes to Reform the Estate Tax

Senator Sanders Proposes to Reform the Estate Tax

February 1, 2019

Alan Essig
Alan Essig
Executive Director

Progressive tax proposals are finally being discussed with the urgency and seriousness they deserve. Following Rep. Alexandria Ocasio-Cortez’s call for a much higher marginal tax rate for multi-millionaires and Sen. Elizabeth Warren’s proposal to introduce a wealth tax for those at the very top, Sen. Bernie Sanders has introduced a revised version of his proposal to reform the federal estate tax.

The estate tax is perhaps the least understood tax in America. A recent ITEP report describes how it works, debunks common myths, and explains how Sen. Sanders’s proposal would reform it. Before Congress enacted the Tax Cuts and Jobs Act, individuals could leave more than $5 million to their heirs without paying the tax, and a married couple could leave twice that amount. Most wealthy people could leave far more than that without paying the tax thanks to some breaks that have merit (such as the deduction for charitable bequests) and some loopholes that have no merit (various schemes to stash assets in trusts, e.g.).

Loopholes have weakened the estate tax for years but instead of closing those loopholes, Congress included a provision in the Tax Cuts and Jobs Act to further weaken the estate tax by doubling exemptions. Now an individual can leave at least $11.2 million (and a married couple can leave behind $22.4 million) without paying the estate tax.

Sen. Sanders’s bill would shut down loopholes and lower the exemption to $3.5 million ($7 million for a married couple). Charitable bequests would still be free from the tax and other breaks (for example, provisions generous to farmers) would remain.

The last time the exemption was $3.5 million per spouse was 2009. The ITEP report explains that around 0.2 percent (that’s two-tenths of 1 percent) of deaths resulted in estate tax liability that year.

Even the expanded version of the federal estate tax would likely impact just a fraction of 1 percent of estates.

The ITEP report explores and responds to arguments against a stronger estate tax. For now, I will just say that even if you believe that taxes discourage people from working and building wealth (I do not), you should be comfortable with the estate tax, which only taxes the transfer of wealth to heirs. This should raise few objections.

One new detail in Sen. Sanders’s proposal is that taxable estates in excess of $1 billion would be taxed at 77 percent, the top estate tax rate in place between 1941 and 1976. Of course, this is a marginal tax rate, so if your taxable estate is $1 billion plus one dollar, the 77 percent rate only applies to one dollar.

Very few people would be affected by this, but the superrich have a knack for making their opinions heard and their needs front and center, so it’s no surprise when we hear grumbling about this.

Should you believe it is wrong for the government to assess a higher tax on exceedingly wealthy estates, it’s worth asking what and whose principles would this violate?

Remember that the wealth we are talking about is not like the wealth you or I have. For most, whether we have $400 or $4,000 or $400,000 makes a big difference in how we live. Not so for billionaires. Whether they have $2 billion,$4 billion or $100 billion changes nothing about how they live, because either way they can buy the houses and cars and planes they want. At that point, wealth is a measure of their power.

Some billionaires use that power for charity. Several have signed the “Giving Pledge,” stating their plan to give away the majority of their wealth. Assets they donate, either during their lives or as bequests, would, of course, not be subject to the estate tax.

You may or may not agree with all the causes these wealthy people support, and some have raised valid questions about this charity, which is another think piece altogether. But passing assets to a charity is qualitatively different from passing wealth to heirs, which is what some billionaires do with their power. It is reasonable to ask how much power someone really needs to inherit, particularly when we are talking about hundreds of millions and even billions of dollars worth of power. It’s also worth asking what do we all owe to our democracy? Over time, our collective tax dollars have created the social and economic fabric that allows the wealthy to thrive. Once people achieve a certain wealth threshold, should that income be shielded from taxation?

Anti-tax activists and lawmakers must be admired for their ability to whip up opposition to a tax that touches a tiny number of estates and convince large numbers of Americans that, somehow, they would be affected by it. But the recent debate over progressive taxes indicates that things are changing. Those who oppose a tax that only touches multi-millionaires can no longer just scream that the government is going to take everyone’s stuff. People are paying close attention and are demanding real answers.