Why the Embattled ‘Death Tax’ May Not Be Long for This World

by Haley Sweetland Edwards,

The estate tax has long punched above its weight. Despite applying to less than one-half of 1% of U.S. estates each year–mostly the richest of the rich–it has earned outsize attention in the political ring, often the subject of presidential campaigns, legislative horse-trading and philosophical scrimmages over the proper role of taxes in the Republic. Democrats see it as a populist measure designed to prevent the accumulation of dynastic wealth, while Republicans, who masterfully rebranded it as the “death tax” in the early 1990s, decry it as a penalty on success. With a comprehensive tax-reform bill widely expected to come down the pike in 2017, the battle over the estate tax will likely be at the forefront yet again–with Republicans poised for the first time in more than a decade to land a mortal blow.

Both President-elect Donald Trump and House Speaker Paul Ryan have promised to scrap the estate tax as soon as they can. But neither has yet provided much detail on how, exactly, they’ll pull that off. Will they offset a decline in revenue with an increase in capital gains? When, exactly, would a repeal of the estate tax go into effect?

As of 2016, the rules are clear: upon a married couple’s death, the first $10.9 million of their estate is shielded from tax; everything that exceeds that amount is subject to a 40% rate. Because of those high exemption rates, roughly 99.6% of Americans who died in 2016 didn’t pay estate taxes at all.

Conservatives argue that the estate tax is both unfair, since it extracts large revenues from a sliver of the tax base, and detrimental to the economy. If Trump and a GOP-led Congress nix the tax, thus freeing up the very wealthy to reinvest their billions, and tinker with capital gains, U.S. GDP could increase by 0.7% over 10 years and usher in across-the-board wage growth, according to Stephen J. Entin, a senior fellow at the Tax Foundation.

Democrats say that’s wishful thinking. While the estate tax is often described by critics as a levy on farms and family-owned businesses, Treasury data shows that most of the time it applies to large estates and inherited securities, like stocks, bonds and private-equity funds, where reinvestment often has little effect on wage growth. Democrats also argue that getting rid of the estate tax would create a $269 billion hole in federal coffers over the course of a decade.

In the tax plan on his website, Trump offers to offset these losses in part by eliminating exemptions elsewhere, but it’s unclear how it would work. “There’s zero detail,” says Jay Freireich, a New Jersey–based tax and estates attorney.

Another elephant in the room, says David Lifson, a federal tax-services partner at Crowe Horwath, a large public accounting firm, is whether the repeal of the estate tax would lead to a decline in charitable giving. As of now, the very wealthy face an option at the end of their lives: they can either bequest a portion of their estates to a philanthropic fund, like a civic arts program, university, or museum, or face a hefty tax bill after death.

It was in 1916, exactly 100 years ago, that the estate tax was first imposed, championed by the populist former President Teddy Roosevelt, who worried about the effect of concentrated wealth. Ironically, a century later, it’s another populist revolution that promises to do it in.

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