estate taxes and inequality

Brookings Senior Fellow Henry J. Aaron (born 1936) last month published an op-ed in the New York Times that is now freely available online at Brookings:

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 income tax to include inheritances would end that inequity.

But aren’t inheritences already taxed in the USA? Well some are, but they are few in number because of generous deductions. Moreover, taxation rates are low.

As recently as 1976 the estate tax applied to more than 7 percent of all descendants at a top rate of 70 percent. In 2019, however, just 0.07 percent of all descendants will owe any estate tax, a 99 percent decrease. Successive increases in the estate tax exemption over the last political generation have let all but the wealthiest — and those who neglect to consult lawyers and accountants — escape estate tax almost entirely.

The latest increase in the estate tax exemption came in the 2017 Tax Cuts and Jobs Act. It doubled the already generous estate tax exemption from $11.4 million to $22.8 million for couples, a limit that, as under prior law, will rise with inflation. Congress hid much of the long-term revenue loss from the 2017 law by scheduling many provisions, including the estate tax exemption increase, to expire in 2026. It is a good bet, however, that before 2026 rolls around Congress will make the exemption increase permanent.
Taxing inheritances is not the only way to reduce inequality. Boosting top-bracket income tax rates and ending the practice of taxing capital gains at lower rates than are applied to earned income are at least as important. So are measures that equalize pre-tax income, such reducing the cost of college or other post-secondary training for those of modest means. But measures to narrow inequality in pre-tax incomes will take time to enact and even more time to take effect. Meanwhile, a little help from an inheritance tax would be welcome. It is a tax that fits logically within our current income tax framework. It cannot reasonably be cast as a ‘death tax,’ and will be seen as fair. And it will help reduce the deficit or pay for needed public services.

Henry J. Aaron, “To reduce inequality, tax inheritances”, Brookings op-ed, 14 November 2019.

To reduce inequality, tax inheritances

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