Picture granny in her rocking chair on the sidewalk, her possessions piled on the curb, with a “For Sale” sign on a small bungalow behind a white picket fence.
The storyline is she has to sell her house to pay estate taxes. The script doesn’t tell you who died. (Her husband?) It doesn’t matter, because the ad is total b.s.
That was an actual billboard I saw in Seattle in the 1980s advertising an initiative to repeal Washington’s estate tax. The implication that estate taxes push poor widows out of their homes (an alternative story speaks of losing family farms) is completely false. No widows lose their homes to estate taxes, because (1) the death of a spouse isn’t a taxable event, (2) personal residences (and nearly all family farms) are exempt from estate taxes, and (3) the first several million dollars are exempt.
The reality is that only heirs of very rich people pay estate taxes. And they should; I’ll explain why below. But Republicans disagree. And because this tax isn’t understood by the public, they get away with convincing average Joes that they’ll be socked with impoverishing “death taxes.” (To be clear, dead people don’t pay taxes; the estate tax is effectively paid by the heirs, as it’s taken out of the estate assets passing to them. In the real world, estate taxes tax unearned income.)
First of all, understand that Republicans believe only wages should be taxed. They’re against taxing capital gains, dividends, interest, and other income derived from owning assets. They want only working stiffs to pay taxes. Call it the Leona Helmsley doctrine of taxation.
They’ve never quite achieved that tax nirvana, but they do have a cozy deal for themselves. The estate tax is an example.
You can’t comprehend the estate tax without understanding the basis step-up, because the two go hand-in-glove. Explaining this requires some simple math, so bear with me.
For tax purposes, “basis” is what you paid for an asset, which is always subtracted from the selling price to determine any taxable gain. Let’s say you bought land for $100,000 and sold it for $150,000; the gain is $50,000, and $50,000 is potentially taxable, not $150,000. In other words, only the profit can be subject to tax.
But thanks to the basis step-up, no estate ever has a taxable gain. That’s because the basis is adjusted to current market value when assets transfer into an estate. Let’s say grandpa bought land 40 years ago for $100,000, it’s now prime commercial real estate worth $2.5 million, and it’s part of his estate when he dies. The taxable gain is not $2.4 million, it’s zero. If the heirs eventually sell the property for $3 million, their taxable gain will be $500,000 ($3 million – $2.5 million adjusted basis), even though they made a $2.9 million profit. The other $2.4 million is never taxed, unless under the estate tax.
That’s why Republicans campaign relentlessly against estate taxes. Many wealthy families own appreciated real estate, business, stocks and bonds, and other assets on which they’ve paid no income or capital gains taxes, and if that wealth keeps getting passed down to succeeding generations, without an estate tax it would never be taxed. If Congress did eliminate estate taxes, it could avoid that situation by also eliminating the basis step-up, which would then require the heirs to pay capital gains taxes when they sold or traded assets.
That’s fair, because everybody else has to pay taxes, but our tax codes weren’t designed to be fair. They play favorites. The end result is that money made from owning assets is lightly taxed (or not at all), while money earned by working for wages is heavily taxed. Like I said, we’re a capitalist country, and the system caters to capitalists.
Now back to granny in her rocking chair. The fact is, almost nobody pays estate taxes. In 2019, two years after Trump and a Republican Congress doubled the exemptions, exactly 2,570 estates in the entire U.S. paid estate taxes. (See story here.) That’s roughly 50 families per state. They paid a total of $13.2 billion in net estate taxes, which averages out to $5,136,187 of taxes paid per estate. These aren’t poor people. They’re mostly children of very rich people. And after paying the estate tax, there’s plenty of money left over, and they’re still very rich, and unlike wage earners they never had to work for it.
The only thing outrageous about the estate tax is that so few estates pay it, and so much wealth goes completely untaxed, while working people have to pay taxes on the wages they sweat for. All Democrats want to do is repeal the Trump-era increase in exemptions, and put things back the way they were, when the basic exemption was $5 million for individuals and $10 million for couples. That might double the number of estates paying taxes, to around 5,000 per year.
But it won’t pass this Congress. Senate Republicans won’t let it. They want to keep the sweet deal they have now for themselves and their rich friends.