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The Democratic candidates for the presidency — especially Warren and Sanders — have proposed establishing new “wealth taxes” to address income inequality in the US. This is an important conversation for our country to have, because income inequality is at a five-decade high now in the US, and has insidious effects on the entire population. But these proposals would be difficult to implement, and there’s concern that such taxes might even be subject to a constitutional challenge.
But before we get lost in that debate, I want to reacquaint everyone with the tax we already have on the books that addresses income inequality: the Estate Tax. A decades-long campaign by the ultra-wealthy has successfully confused and misinformed United States taxpayers about what the estate tax actually is and who it affects. Among those families are several of the art world’s biggest patrons, including the Koch, deVos, Mars, Bass, and Walton families.
So what is the estate tax? It is a law, currently in place, that taxes extreme wealth upon the death of the taxpayer. When an ultra-wealthy, single taxpayer dies, her total assets over $11.58 million are taxed at 40%. If a couple are married, that threshold doubles to $23.16 million. (These are the 2020 rates; the tax is indexed to inflation.)
The taxpayer never pays this tax during her lifetime — she is taxed when it doesn’t hurt — after her death. To be clear, not one dollar of her estate below the threshold is touched by this law. So, all Americans, regardless of wealth, can inherit a $23.16 million dollar estate (from a married couple) or a $11.58 million dollar estate (if inheriting from an individual) tax free.
Given that it takes $10.3 million net worth to be in the top 1%, (according to data from the 2016 Federal Reserve survey of consumer finances) the estate tax doesn’t even touch everyone in the 1%. In 2018, only 1,900 estates owed any estate tax. This means 99.9% of the estimated 2,700,000 people who died in 2018 paid no estate tax at all.
The estate tax was established in 1916, as a Progressive-Era remedy for wealth inequality. Theodore Roosevelt pushed for it as a way to ensure equality of opportunity among Americans — and to prevent the concentration of wealth in the hands of a very few wealthy families.
Part of the reasoning for this tax is that much of the wealth in the hands of the very wealthiest Americans never gets taxed at all. Why? The majority of assets in large estates consist of “unrealized gains,” meaning, they are the growth in the value of the assets held (ie, an art collection, real estate, stocks and bonds, etc). Under US law, these gains are only taxed upon being “realized” — generally when they are sold or transferred. In 2009, 55% of all estates over $100 million consisted of unrealized gains. And taxes are already more favorable for the wealthy than for the middle class. The highest wealth individuals pay a lower tax rate than Americans who work — because these individuals generally make their money from capital gains, instead of “earned” income like the rest of us. This is what Warren Buffett means when he says he pays a lower tax rate than his secretary. Income tax rates are higher than capital gains rates.
To use an art world example: most of the art handlers, curators, and artists involved in any given museum show are paying a higher tax rate than most of the members of that museum’s board of directors. The artists and arts workers are taxed largely at the income tax rate, while the collector class is paying tax at the more favorable capital gains tax rate. The estate tax was established — and kept — as a mild correction for a taxation system that skews in favor of the wealthy. Further, it is meant to slow the concentration of wealth into the hands of a small group of families. Think of it as an anti-oligarchy tax.
For those who believe the government should not play a role in such matters, it’s important to note that the racial wealth gap in our country widened because of government policy: redlining, segregation, access to education, and eviction laws. Just laws are the rightful remedy to counteract the discriminatory laws that set up this problem in the first place.
So if the estate tax is so great, why do Americans feel so negatively about it? It’s not an accident. The wealthiest families in America, many of them mega-collectors and patrons of the arts (and the ones with the most to gain from repeal) have spent decades and millions of dollars lobbying to repeal the estate tax, as well as perpetuating the false notion that the estate tax would hurt farmers and small businesses. These include the Koch (Metropolitan Museum of Art), deVos (ArtPrize, Kennedy Center for the Performing Arts, Bass (Kimball Art Museum), and Walton (Crystal Bridges Museum of Art) families, among others. Their success has been remarkable. When average Americans call it the “death tax,” they are using the terminology of repeal supporters. (This term was first coined in the 1940s by estate tax opponents, and was revived in the 1990s by the Republican Party.) But a more accurate label might be the “silver spoon tax” or even the “Jared and Ivanka tax.” Death happens to us all. Inheriting a $25-million-dollar estate only happens to the children of the top 0.1%.
This successful obfuscation around the estate tax has had a big effect. There was little objection raised when Republicans quietly doubled the estate tax threshold as part of the 2018 Tax Cuts and Jobs Act — from $10.98 million (for married couples) in 2017 to $22.4 million in 2018.
We have a growing problem with wealth inequality in this country. And while I applaud the proposals of the Democratic candidates — and hope we can enact them — I want everyone to know that we have a far easier path. The estate tax was made to address this problem, and we simply need to fall back in love with it, and lower the exemption threshold back to its formerly more effective level.
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