A Fair Way to Tax Dynastic Wealth

A good way to do this would be to substitute inheritance taxes for estate taxes. Such an approach wouldn’t tax the entirety of an estate all at once at the time of death, but instead would tax individual recipients when they receive their money. And rather than apply one national tax rate, inheritances would be taxed at each heir’s ordinary income-tax rate. The gaming that now takes place would be minimized — although not eliminated — because there would be less to gain by preserving wealth through generations with trusts and other artifices.    

It would also be highly progressive: Those who earn more than $415,000 in regular income would pay the top income-tax rate of 39.6 percent on inheritances. Those with incomes below that would pay inheritance taxes at lower income-tax brackets. 

New York University Professor Lily Batchelder, a former staff member of the U.S. Senate Finance Committee, proposes such a system. She would tax inheritances at ordinary income-tax rates, plus a 15-percent surtax. She would exclude amounts below about $2 million and, like Obama, include unrealized capital gains, except she would tax the full gain after an heir sells the stock or bond, not at the time of the donor’s death (to avoid forcing heirs to sell assets to pay inheritance taxes). To prevent manipulation, such as a beneficiary who quits a high-paying job to get into a lower tax bracket, she would average the previous five years of income to determine an individual’s rate.     

Inheritance taxes, used by six states, would encourage the breakup of large estates if applied nationally. That’s because it would confer a tax advantage to including more heirs in a will, particularly those in lower tax brackets. Currently (and theoretically, given the loopholes), Grandpa Joe’s $100 million estate would be taxed at his death, and it would pay the same amount of tax no matter how many heirs he has, or what their income levels are. But under Batchelder’s proposal, Grandpa Joe could give just under $2 million to 50 people, and none of them would pay the tax. 

The U.S.’s estate tax dates to 1916, and its goal then was to reduce inequality. At the time, accumulations of wealth by industrial barons were seen as un-American. President Franklin D. Roosevelt said in 1935 that “inherited economic power is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our government.”

Democrats today would agree with that. Now their presidential candidates just have to propose a more equitable and effective plan to address it.

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