As House and Senate Republicans pursue competing tax overhaul plans, one big disagreement is the estate tax. House Republicans want to repeal it in 2024 while their Senate colleagues want to preserve it.
The House’s repeal plan would be a windfall for a small number of the richest Americans. My Bloomberg View colleague Al Hunt notes that the estate tax affects only 0.5% of all estates. Both the Senate and House plans would double the estate tax exemption to $11 million from $5.5 million per individual, which would further shrink the percentage of affected estates.
Nevertheless, average Americans dislike the estate tax. A variety of polls over the years have shown that most Americans want to repeal it. Ipsos recently conducted a survey for National Public Radio and found that 65% of respondents favor repeal.
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That isn’t entirely surprising. The freedom to get rich or die trying — as Curtis Jackson once put it — is a cherished American ideal. So it makes sense that most Americans don’t want the government to seize their money, however unlikely it is that they will amass a fortune greater than the estate tax exemption.
But that opposition is misguided. Dynastic wealth erodes democracy, and the estate tax is a useful tool for breaking up fortunes over time. With wealth inequality at the highest level since the Gilded Age, now seems like a particularly bad time to abandon that protection.
There is a consolation prize in the House plan, however. Repeal of the estate tax would open a never-before-available path for average Americans to enrich their heirs. That path is created by repealing the estate tax and preserving the step-up in basis for inherited assets.
Here’s how the step-up works: Let’s say you invest $10,000 in an S&P 500 index fund. Your basis is $10,000. Then let’s also say that investment increases over time to $50,000. You have an unrealized gain of $40,000, on which you would pay tax if you sold the investment. But if you bequeathed that investment instead, your inheritor’s basis would “step up” to $50,000, which means that inheritor would only pay tax if the investment was sold for more than $50,000.