The estate tax has been under assault by Republicans in Congress for more than four decades. According to a paper published on Nov. 2 by Isabelle Sawhill and Eleanor Krause of the Brookings Institution, the estate tax currently applies to “a tiny fraction of American estates — about 2 out of every 1000 deaths,” compared with “the 1970s, when there were over 70 taxable estates for every 1000 deaths.”
While income inequality is high in the United States — the World Economic Forum ranked us 29th out of 30 developed countries in 2017 — wealth inequality is much greater.
In “Deconstructing Household Wealth Trends in the United States, 1983-2013,” Edward N. Wolff, an economist at N.Y.U., calculates that the Gini coefficient measuring wealth distribution increased from 0.799 in 1983 to 0.871 in 2013. The Gini coefficient measuring income distribution increased from 0.480 to 0.574 over the same period. (The Gini coefficient is a gauge of economic inequality ranging from 0 to 1.0, with 0 representing perfect equality and 1.0 representing perfect inequality.)
While proposing to eliminate the estate tax altogether, the House bill would retain a provision in current law — the step-up in basis — that effectively wipes out all tax liability for heirs on the increased value of assets at the time of death. Forbes declared, “this is a tax cut for the rich,” and described what would happen using the step-up in basis if you died with an estate that had grown in value from $10 million to $100 million:
There would be no estate tax, and your heirs could sell the stock right after your death and owe no capital gains taxes on the $90 million gain.
Many of the very richest Americans have children who stand to benefit enormously if the proposed tax bill is enacted. The list of these billionaires includes Mark Zuckerberg, Michael Bloomberg, Larry Ellison, Charles Koch, Sergey Brin, Larry Page, Phil Knight, Carl Icahn, Pierre Omidyar, David Koch, Warren Buffett, Bill Gates, Steve Ballmer, Sheldon Adelson, Michael Dell, Jeff Bezos, George Soros, and, of course, Donald Trump.
According to calculations made by Chye-Ching Huang, the deputy director of federal tax policy at the Center on Budget and Policy Priorities, a liberal think tank,
repealing the tax would give about 330 estates (which are each worth more than $50 million) each a tax cut averaging more than $20 million compared to current law.
The estate-tax provisions in the proposed bill are explicitly designed to help preserve and protect the assets of the wealthiest Americans. And despite their stated purpose, the corporate tax breaks in the legislation will not encourage new investment, according to many economists, but will instead reduce the taxes due on existing investments.
Alan Krueger, a professor of economics at Princeton who was the chairman of the Council of Economic Advisers from 2011 to 2013, put the case against the Republican tax bill succinctly in an email:
Several components of the House bill favor physical and financial capital over labor and human capital — namely, the lower rate for passive pass through income, the repeal of the estate tax, the big cut in the corporate tax rate, the failure to end the carried interest loophole, etc. At the same time, the tax on university endowments and treatment of grad student fellowships will slow human capital investment.
If enacted, these features of the proposal would also deepen and further entrench existing class divisions and reduce economic mobility.
One of the biggest obstacles facing critics of the tax bill is that laws governing taxation are extremely complex. The description of the bill by the Joint Committee on Taxation is 299-pages long and it details only the bill’s provisions, without any discussion of possible economic consequences. Crucial provisions governing arcane but crucial matters like carried interest, step-up in basis, pass-through corporations and passive investments are inherently opaque.
In an effort to inform the public, the Joint Committee and the nonpartisan Tax Policy Center have released charts and analyses explaining who benefits and who loses by income class. Both the committee and the center challenge Republican claims that the main goal of the legislation is to give the middle class a tax break.
The Tax Policy Center report, “Preliminary Distributional Analysis of the ‘Tax Cuts and Jobs Act’,” concludes that:
The largest cuts, in dollars and as a percentage of after-tax income, would accrue to higher-income households. However, not all taxpayers would receive a tax cut under this proposal — at least 7 percent of taxpayers would pay higher taxes under the proposal in 2018 and at least 25 percent of taxpayers would pay more in 2027.
By 2027, the center found, those in the bottom two quintiles would, on average, get very modest annual cuts of $10 and $40; those in the third, fourth and fifth quintiles would get average cuts of $320, $710 and $3,860. Those in the top 1 percent would get a $52,780 tax cut and those in the top 0.1 percent a $278,370 cut.
Who Would Get What
Distribution of proposed federal tax changes by 2027.
Bottom 20 percent
Second 20 percent
Middle 20 percent
Fourth 20 percent
Top 20 percent
Top 1 percent
Top 0.1 percent
In other words, the Trump tax bill, contrary to the president’s populist spin, is a classic trickle-down proposal, concentrating by far the largest share of benefits on corporations and the rich.
The most expensive parts of the tax bill are a reduction in the corporate tax rate from 35 to 20 percent, with lost revenues totaling $1.46 trillion over ten years, along with a five-year provision letting corporations immediately write off the entire cost of capital investments, instead of depreciating them over several years, with an additional revenue loss of $84.2 billion.
Larry Summers, a professor of economics at Harvard who served as secretary of the Treasury from 1999 to 2001, argues, along with a number of other economists, that the combination of the rate cut and the immediate write-off of investments — known as “expensing” — amounts to a very high-cost expenditure that produces very little social benefit.
In his Nov. 5 Financial Times column, Summers writes:
What is the compelling case for cutting the corporate rate to 20 per cent? Under the proposed plan, for at least five years businesses will be able to write off investments in new equipment entirely in the year they are made. So the government is sharing to an equal extent in the costs of and the returns from investment, eliminating any tax induced disincentive to invest. The effective tax rate on new investment is reduced to zero or less, before even considering the corporate rate reduction. Corporate rate reduction serves only to reward monopoly profits, other rents or past investments. After the trends of the past few years, are shareholders really the most worthy recipients of a windfall?
In a phone interview, William Gale, a federal tax policy expert at Brookings, contended along similar lines that
if corporations can immediately write off new investments for equipment, then the corporate rate cut on those investments amounts to only a windfall gain, cutting taxes on returns to old investment. With expensing, corporations that use debt financing with tax deductible interest payments end up getting tax rebates to cover some of the costs of new investments regardless of the statutory tax rate.
In a blog post called “All Hail the New Plutocratic Industrial Policy,” Daniel N. Shaviro, a professor of tax law at N.Y.U., argues that the tax bill has been carefully crafted to create a new class of rich people who can evade the 39.6 percent top rate and pay at a 25 percent rate by capitalizing on complex “pass-through” and “passive-income” provisions:
So what must you do, or whom must you be, to get the 25% rate? First, you get it for 100% of your net business income from passive activities, which generally are business activities in which you personally do not materially participate. This typically applies to people who invest money in all kinds of partnerships, S corporation activities, et cetera that engage in pretty much any type of business.
Shaviro calls this obscure set of provisions in the tax bill “a weapon to enhance plutocracy — offering the biggest rate cut to millionaires,” allowing those “who are in effect rentiers to get the low (25 percent) rate” on all their income.
A Nov. 2 analysis by the Center on Budget and Policy Priorities of the 25 percent rate for passive investors supports Shaviro’s point. A key reason the tax plan “is costly and heavily tilted to the wealthiest households is its special, much lower top rate for ‘pass-through’ business income,” Chuck Marr, Chye-Ching Huang, Brandon DeBot and Guillermo Herrera, all on the center’s staff, write. They continue:
Pass-through income would be taxed at no more than 25 percent, far below the 39.6 percent top individual income tax rate that now applies to pass-through income, or the top 35% top rate that would apply to individual income under the GOP plan. This would provide a massive windfall to the very wealthy.
This section of the bill has been nicknamed the “Trump loophole” by the center
because Donald Trump exemplifies the type of business owner whom it would most benefit.
Allan Sloan, a columnist for The Washington Post, wrote on Nov. 7 that
We don’t know how much Trump collects in such income, which has become passive for him since he put his children in charge of his enterprises rather than running them himself. But given that he seems to have stakes in at least 500 pass-through entities, it looks like reducing his rate to 25 percent from 39.6 percent would save him a ton of money.
Adam Looney, a Brookings senior fellow, is also sharply critical of the pass-through tax breaks. In a Nov. 3 essay that includes many favorable comments on the tax bill, Looney writes:
Ditch the pass-through break, the one that taxes income of partnerships and other businesses organized in forms other than corporations at a rate lower than it taxes wages. This is a compliance and complexity nightmare. There’s no economic reason to apply lower tax rates on businesses based on how they are organized, no justification to tax entrepreneurial income differently based on how it is earned, and no way to differentiate between one form of business activity and other without onerous rules and intrusive audits.
For political reasons, Looney argues, Republicans should eliminate the break to
help avoid the caricature of “tax cuts for the rich.” No form of income is more concentrated among top-income taxpayers than pass-through business income and the reduced rate would only benefit taxpayers in the highest two brackets (e.g., married taxpayers earning over $260,000).
But “tax cuts for the rich” is no caricature. This year’s bill is already setting new tax avoidance schemes in motion — see “Tax reform: Advisers spy loopholes in proposed pass-through tax rules” — as it becomes clear once again that a favor-the-rich, reward-the-already-affluent ideology is embedded in the Republican Party’s DNA.