As GOP Lawmakers Eye Cutting Estate Tax, Will They Increase Income Inequality?

Dec 7, 2017
Originally published on December 7, 2017 10:24 am

Republicans in Congress are on the verge of fulfilling their longtime dream of eliminating the federal estate tax, and they could do it in a way that is even more generous to heirs than previous repeal efforts.

Bills passed by the Senate and the House recently would reduce or scrap the taxes heirs now pay on estates larger than $5.5 million. And the bills would do so without repealing the so-called "stepped-up basis" provision.

Ordinarily, people have to pay taxes when they sell off assets that have appreciated in value, like shares of stock or real estate. But heirs are exempted from that tax. That's because they already pay the estate tax.

The bills approved by Congress recently would eliminate or reduce the estate tax, while leaving the exemption in place.

In other words, you would be able to pass on assets that have gained a lot in value — like those Apple shares you bought years ago — and, unlike everyone else, your heirs never have to pay tax on the appreciation.

To put it another way: Someone could inherit her grandfather's large beachfront mansion without paying estate tax, and sell it off right away without paying any capital gains tax.

It's a much more generous policy than previous tax overhauls, says Lily Batchelder, a professor of law and public policy at New York University Law School.

"We've never seen a proposal like this," she says. "I don't recall ever seeing a proposal that would both fully repeal the estate tax and fully exempt from tax all the accrued gains on these giant estates."

The bill passed by the Senate early Saturday would double the exemption on large estates, allowing people to pass on estates worth $11 million to their heirs tax-free.

The exemption for married couples would be $22 million. The House bill would gradually reduce the estate tax and then scrap it altogether in 2023.

House and Senate leaders are now trying to reconcile the two versions of the tax overhaul, with a vote expected by the end of the month.

The estate tax has long been the bane of conservatives. Congress briefly eliminated the tax in 2010, but it came back the following year and remains in place today.

"We just think it's unfair. Death should not be a taxable event. And we should not be stopping people from being able to pass their life's work on to their kids," House Speaker Paul Ryan told Fox News recently.

The estate tax brings in a relatively small amount of money to the federal Treasury, about $19 billion a year, even as it hurts the large economy, says Scott Hodge, president of the Tax Foundation.

Because of the tax, people end up pouring money into tax shelters and paying hefty bills to tax lawyers, he says.

The tax is especially onerous for assets that may be worth a lot on paper but are cash poor, such as certain kinds of businesses, Hodge says. In some cases, heirs have to break up or sell businesses to pay taxes, he says.

People who want to keep the tax say such cases are extremely rare. They also say that at a time of growing income inequality, the estate tax plays an important role in making the economy fair.

"The estate tax is basically a way of partially leveling the playing field, so that these heirs of massive estates don't have quite as gigantic a leg up in life," Batchelder says.

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Republicans in Congress are on the verge of fulfilling a long-held dream. The House and Senate have passed bills that would eliminate or reduce the tax that people pay when they inherit large estates - larger than $5.5 million. It's part of the massive tax overhaul legislation that is in its final stages in Congress right now. And even though Republicans have tried for years to scale back this tax, NPR's Jim Zarroli says this effort goes further.

JIM ZARROLI, BYLINE: The last time the estate tax was repealed, the move was temporary. During the George W. Bush administration, Congress gradually reduced the tax and then ended it altogether in 2010. But the tax came back the next year and remains in place today. Now Republicans are pushing a permanent repeal. Here was House Speaker Paul Ryan on Fox News recently.


PAUL RYAN: We just think it's unfair. Death should not be a taxable event, and we should not be stopping people from being able to pass their life's work onto their kids.

ZARROLI: This time, Republicans could get their way. The bill approved by the Senate would double the estate tax exemption, which means many fewer people would have to pay it. The House version would reduce the tax and then scrap it in 2023. And these bills would be more generous to heirs than previous repeal attempts because of a provision in the tax code. That provision means, if you have an asset that's climbed a lot in value over the years, like your Apple stock or a Warhol print, you can leave it to your heirs, and they don't have to pay taxes on the appreciation. New York University law professor Lily Batchelder says this goes beyond previous repeal bills.

LILY BATCHELDER: It would really mean that these giant estates - a lot of them would have never been taxed under the income tax, and then there no longer would be an estate tax.

ZARROLI: Critics of the estate tax, like Scott Hodge of the Tax Foundation, point out that it only raises about $19 billion for the Treasury each year, but it hurts the economy.

SCOTT HODGE: Its effect on the economy is outsized, in terms of what it does to change people's decision-making, in terms of the kind of investments they make, how they set up their affairs and other things. And so it can have a pretty serious consequence on economic growth.

ZARROLI: Hodge says the estate tax encourages people to spend money on tax lawyers and tax shelters. He says it can be really burdensome for people who inherit assets that are worth a lot but are cash poor, like certain kinds of businesses, so people who inherit them may be forced to break them up or sell them off. But people who want to keep the estate tax point out that such cases are really rare. NYU's Lily Batchelder says the estate tax has an important function.

BATCHELDER: The estate tax is basically a way of partially leveling the playing field so that these heirs of massive estates don't have quite as gigantic a leg up in life.

ZARROLI: That's important, she says, at a time of growing inequality. But if the repeal effort fails, it could be less about the wealth gap than the budget deficit. Numerous analysts say the tax overhaul will increase government debt. That means Republicans could once again be forced to reduce the estate tax but not eliminate it altogether. Jim Zarroli, NPR News, New York.

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