It could be the fight of the century. One hundred years after its enactment, the battle over the survival of the federal estate tax is about to begin. The Republican Congressional leadership has made estate tax repeal a priority. The Democrats are opposed to repeal. So, how will this fight play out?
Like a heavyweight fight, a little something like this: In the red corner is the GOP, arguing that the estate tax is the most unfair tax of all, imposing a duty on the transfer of wealth which was already taxed when it was earned. In the blue corner is the Democratic Party, arguing that the estate tax plays an important role in reducing wealth inequality. The referee comes to the center of the ring, the fighters tap gloves and the opening bell sounds.
The Democrats come out swinging and land the first blow. They argue that a recent study by Oxfam, entitled An Economy For The 99%, suggests that the wealthiest eight people in the world have a net wealth of $426 billion, which is the equivalent of the amount of wealth held by the bottom half of the world’s population. This country needs less wealth inequality to reinvigorate the middle class, which requires the imposition of an estate tax on the wealthiest Americans.
The GOP punches back, arguing that the founding of this country started in Boston Harbor in 1773, where a group of patriots who were sick and tired of the imposition of a tax imposed by a corrupt Parliament, took a stand for an independent America. It is, the GOP argues, simply un-American to extract a tax on an inheritance that was hard earned.
The Democrats step back, recover and approach the middle of the ring again. They then land a combination. Quoting none other than Teddy Roosevelt, they claim that “(t)he man of great wealth owes a particular obligation to the state, because he derives special advantages from the mere existence of government.”
They then quote Bill Gates Sr., "No one accumulates a fortune without the help of our society's investments. How much wealth would exist without America's unique property rights protections, public infrastructure, and academic institutions? We should celebrate the estate tax as an 'economic opportunity recycling' program, where previous generations made investments for us and now it's our turn to pass on the gift. Strengthening the estate tax is important to our democracy."
The GOP falls back, but it doesn’t hit the canvas; rather, it counter-punches. They assert that Whoopi Goldberg – yes, the GOP is citing Whoopi – eloquently stated "I’d like somebody to get rid of the death tax. That’s what I want. I don’t want to get taxed just because I died. I just don’t think it’s right. If I give something to my kid, I already paid the tax. Why should I have to pay it again because I died?" The GOP further argues that while the Federal estate will generate $275 billion over the next ten years, that amount is less than 1 percent of Federal revenue over that period. A repeal will have a very modest effect on the budget, and that lost revenue will be replaced by the taxes on the reinvestment of the inheritance by the inheritors, and the preserved capital in the hands of the inheritors will create jobs.
The Democrats come back swinging. They argue that the federal estate tax exemption is higher than it has ever been - $5.49 million. That means a couple could pass $10.98 million without the imposition of any estate tax. Moreover, even billionaires get the benefit of the passing of $10.98 million tax free. In order to replace the lost revenue, Congress will need to find another source for this lost revenue, and that is likely to be a new burden on the middle class.
Then, from the GOP corner comes a voice: “Wrong.” Why it’s Donald Trump. He’s now in the fight. He says that he’s got a new idea to replace the lost revenue from the repeal of the estate tax. He claims that instead of an estate tax, he wants to tax unrealized investment gains at death; not all investment gains, just those over $10 million. According to Trump’s former campaign website: “The Trump Plan will repeal the death tax, but capital gains held until death and valued over $10 million will be subject to tax to exempt small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.” Neither the Republican Congressional leadership nor the Democrats are in favor of this plan. The bell rings ending the first round, and the fighters return to their corners.
So, that’s where we are now. The fight is joined, and there are at least three different fighters who will do battle in the coming rounds. How this plays out is anyone’s guess.
Gary R. Botwinick is chair of the Einhorn Harris Taxation/Trusts & Estates Department.