The estate tax is becoming so small that it can be “drowned in a bathtub,” undoubtedly to the delight of Grover Norquist, who coined that phrase.
In reality, the estate tax is disappearing all by itself, thanks to gaping loopholes that our leaders refuse to close. Congress could do nothing and estate tax revenues would dwindle, year by year.
Sooner or later, estate tax revenue will be puny enough that Kyrsten Sinema and her Republican friends will be able to get their way.
But why bother drowning the estate tax, if it’s going away as a practical matter anyhow?
Because repealing the estate tax, if done in the manner outlined in the so-called “Death Tax Repeal Act,” recently passed by the House, will confer an income tax windfall on the ultra-wealthy, in two ways, neither of which is the least bit recognizable to average Americans.
First, taking advantage of those estate tax loopholes does have a price (besides the stiff fees that estate planners charge). In order to “structure” their estates to avoid the estate tax, the ultra-wealthy typically face a trade-off that forces them to pass assets to their children that are loaded with untaxed appreciation, which will be subject to tax when the children sell those assets.
The bill just passed by the House will eliminate that problem, thus providing an income tax windfall. More than half of very large estates consist of unrealized gains that have never been taxed. And if the House has its way, those gains would never be taxed.
The other income tax windfall is harder to recognize, but here’s what’s at play: A married couple now can leave $11 million to their children free of estate tax, and as much as they want to charity free of estate tax. So, suppose a married couple is worth $21 million and is leaving $10 million to a charity, with the remaining $11 million to their children.
That couple doesn’t care if the estate tax is repealed, right? Wrong! Here’s why: If the estate tax is repealed and if they trust their children, they can leave the entire $21 million to their children, and leave it to the children to carry out their wishes that $10 million goes to charity. Yes, their children could break their promise, but most folks would trust their kids in this situation.
The result? The kids can “structure” their affairs to get a $10 million income tax deduction for those charitable contributions, netting them a nifty income tax savings of up to $4 million, to top off their $11 million inheritance.
Charitable deductions claimed on estate tax returns in 2013 totaled over $13 billion. If those deductions are no longer needed for estate tax purposes, they’ll translate into some pretty hefty income tax savings. For the top .1%, of course.
So, it’s a bit Orwellian, but estate tax repeal is not about the estate tax.
And it’s a really, really bad idea.