New Estate Tax Changes and Inequality

2018 is shaping up as a great year to die. I don’t say that because of the recent appointment of war hawk John Bolton as National Security Advisor1, but rather because of recent changes to estate tax rules.

Before now, the previous best year to die was 2010, when the estate tax took a gap year, like the proverbial kid who hitchhikes the entire length of Chile after high school before heading off to college. I remember that year mostly because, as a result of this legislative gap year quirk, the Steinbrenner sons Hal and Hank – owners of the New York Yankees2  – potentially saved hundreds of millions of dollars in estate taxes when family patriarch George happened to die in 2010 rather than 2009 or 2011.

But we’re back to some good times for dying; following the big federal tax reform passed December 2017.

Some people who hate the estate tax – a tax known by those haters as the “death tax” – point out the cruelty of the government taxing something like death. Those twin unavoidable certainties of life – death and taxes – together in one nasty package!

Steinbrenner’s death was timely

But that’s the wrong way to look at it. Economic theory and common sense posit that we should heavily tax the things we don’t want to see more of. As in the examples of cigarettes, alcohol, and affordable Chinese steel, we apply taxes to reduce their occurrence in our lives.  If we want to reduce death, we should tax it heavily. Lower the tax on death and we should reasonably expect an uptick in untimely deaths among the super rich.

If you’ve forgotten the reform passed in December 2017 – and if you have a net worth less than $25 million I don’t blame you for forgetting – Congress doubled the estate tax threshold, to $11.2 million per individual and $22.4 million per couple. That means that a lucky child of a wealthy family can inherit her first $22.4 million from mom and dad tax free! After that, the remaining estate would be subject to a 40 percent tax rate, although of course armies of tax and estate lawyers stand ready and able to reduce the full impact of that 40 percent tax rate.

The number of estates that will exceed the $22.4 million threshold – meaning subject to the estate tax – halved, from an estimated 5300 estates in 2017 to 1700 estates in 2018.

The next great thing to encourage death in 2018 – based on the 2017 tax reform – is the law’s maintenance of a step-up in basis for inherited appreciated assets. In plain language, that means most heirs will save big on capital gains taxes on inherited shares of stocks. An example may help explain the step up in basis concept. If Grandad’s shares appreciated by $500,000 over his lifetime and he wanted to sell them while still alive, Grandad would likely owe $100,000 on the capital gains, because that’s 20 percent of $500,000. After his death, however, Granddaughter can own the shares with a new cost basis that eliminates all of that $100,000 capital gains tax liability, as if she’d bought the shares at the new current price at the time of death. This represents another great tax incentive in favor of, well, death.

I imagine two kinds of readers of the above paragraphs. The first kind is like “why is he talking about such huge amounts of inherited money? Why doesn’t he focus on ordinary people’s investment portfolios? I can’t relate!”

The second kind of reader (a smaller group) is like “Shhhhh-ut up. Somebody tell him to shut up about that stuff. Hopefully most people can’t relate to the gift we just got handed in 2017, and their eyes will glaze over.” Put it this way: YOU may not have paid attention to the raising of the estate tax limit and the maintenance of the step-up in basis law, but everyone with a net worth over $25 million definitely noticed.

I’m being a bit flip about death taxes, partly because I know that it inspires a bunch of hate mail every time I write about it, and I’m steeling myself with humor for the nasty comments to come. At the same time, wealth inequality is one of the top three issues in America, and the estate tax is one of the symbolic ways we address wealth inequality.

Now I know as a practical matter, the estate tax has not historically raised significant government revenue. Also as a practical matter, the estate tax inspires inefficient tax-avoidance strategies.

As a symbol of societal priorities, however, the estate tax matters a lot, at least to me. My man Winston Churchill – grandson and nephew to the Duke Marlborough and deeply enmeshed his entire life in the British aristocracy – said estate taxes provide “a certain corrective against the development of a race of idle rich.”

The American history that I read as a kid taught that opposition to an entrenched aristocracy is one of the defining points of agreement in American political thought. We no longer seem to agree on this point.

My eldest daughter was born on the same day as the French celebration of Bastille Day, so every year we make a “let them eat cake!” joke after she blows out her candles. That iconic historic moment – in which the clueless aristocracy bought their tickets to the guillotine by ignoring the pent up rage of the poor – is why the estate tax matters. Extraordinary wealth inequality normally only changes extremely slowly. But then sometimes – change comes extremely quickly.

The 2017 increases in the estate tax exemption are set to expire without further legislative updating – by 2025. That provides a certain uncomfortable incentive to the very rich in the next few years to, you know, get on with it.


A version of this ran in the San Antonio Express-News and Houston Chronicle


Please see related post:


Death Tax is the Best Tax

Estate Tax Takedown, Levine beat Mankiw

2017 Tax Reform’s True Target


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  1. Badum-cha
  2.  bless their hearts!

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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