Arkady
President
This article makes the argument that there will be a major shift in inheritance patterns in a few years, as Baby Boomers die off an leave their fortunes:
http://www.salon.com/2014/04/02/gen...mericas_coming_inheritance_explosion_partner/
I suppose it makes sense that would be the case. The Baby Boomer generation was unusually large and, at least during the period when "Generation X" was born, produced relatively few heirs. That's a recipe for a much greater share of individual wealth being attributable to inheritance than in prior generations, when big fortunes would have been divided up among more heirs.
To head off the problems associated with excessive wealth inequality (and particularly with having much of the society's wealth in the hands of people who've shown no particular talent), we'd do well to reform inheritance laws now, while there's still time before the Boomers start kicking the bucket in large numbers.
My preferred reform is to exempt a relatively small portion of an estate (e.g., set at 120% of the value of a median home, so that a typical person could leave the family home and personal effects tax free), with everything beyond that taxed as regular income for the heirs. So, for example, if someone died with an estate valued at $1 million, leaving it to three children, something around $275,000 would be exempted, with each heir then having around $242,000 in extra "income" to account for. To avoid having it be too harsh a hit, I'd allow the income to be pro-rated over the next decade, so that, in the described scenario, it would only increase taxable income by $24,200 per heir per year.
However, even short of that kind of comprehensive reform, just rolling the rules back to something more like we had in earlier eras would help. For example, starting in 1942, and throughout our economic golden age (the 50s and 60s), we had a fairly low estate tax exemption and graduated rates that rose as high as 77%. The exemption in that time was $60,000. If we adjusted that for inflation, from the late 60s to today, that would be like a $400,000 exemption today (instead of the sky-high exemption of $5 million we currently have). A $400,000 exemption would allow a fairly nice home and personal effects, or even a genuinely small business, to be handed down without worrying about tax.
Over the years, a number of changes to the estate tax were implemented to benefit the very rich, aside from just a vastly higher exemption and lower rates. In 1980, for example they retroactively repealed the "carry-over basis" rules. In effect, the rule directly before the repeal was that if you inherited property, your "basis" was what the prior owner had paid for it. For example, if someone bought stocks for $100 and then left them to you when they were worth $1000, and then you sold them for $1600, your capital gain would be on $1500 -- the actual capital gain those stocks had experienced. After 1980, you got "stepped up basis," so that you got to pretend you'd acquired the property for whatever it was worth when you inherited it, even though you had not, in fact, paid a dime, so that, in the prior example, you'd only pay capital gains taxes on the $600 of the capital gain that happened to occur after you were handed the stocks, thereby sheltering the majority of the gain from ever being taxed. By simply repealing this rule and going back to carried-over basis, we could reduce the accumulation of wealth by the very rich, while also enhancing revenues in order to cut the deficit. We would also reduce a distortion in the market, since currently the wealthy have an incentive to hold onto assets until they die, even if it would be more economically efficient to sell them, simply because if those assets have unrealized capital gains, those need never be taxed if they're inherited before being liquidated.
So, for example, say you own some land out west that you no longer have any use for, and which others have great use for, and you could really use the cash from selling it to help grow a business you have back east. But say the estern property has millions of dollars of unrealized capital gains, so you'll take a tax hit on it if you sell. The current code encourages you to sit on it until you die, and then your heir can immediately liquidate it tax-free. Meanwhile, the land is being under-utilized and your business is unnecessarily cash-starved. Without stepped-up basis, this isn't an issue, since the taxes will have to be paid sooner or later, by you or your heir, so you may as well make the move whenever it makes sense from a purely business perspective, rather than gaming the tax system.
Another change was letting spouses inherit tax free. It used to be that 50% of jointly owned property was subject to taxation upon the death of a spouse -- the idea being you were being taxed on the half of the property you'd received from your spouse, just as you'd be taxed for property you inherited from anyone else. That was changed so that spouses could inherit unlimited amounts tax free. This allows for multi-generational passage of wealth without tax. For example, a wealth old man can marry a young woman and leaves her all his money tax-free. Decades later, when she's a rich society matron, she can marry a boy-toy and leave him that money tax-free, and so on.
All these changes together resulted in estate taxes bringing in a much smaller share of total federal revenue. Estate and gift taxes brought in 2.3% of total revenues in the mid-1960s, and as of 2009 (in 2010, there was no estate tax), that was down to 1.1%, a decrease of over half. And because of that, the rule changes have played some role in sky-rocketing wealth inequality in this country. Simply by rolling back some or all of these rules to something closer to what we had in the 1960s, we could minimize the social damage tax-free and low-tax inheritance of large estates has been causing.
http://www.salon.com/2014/04/02/gen...mericas_coming_inheritance_explosion_partner/
I suppose it makes sense that would be the case. The Baby Boomer generation was unusually large and, at least during the period when "Generation X" was born, produced relatively few heirs. That's a recipe for a much greater share of individual wealth being attributable to inheritance than in prior generations, when big fortunes would have been divided up among more heirs.
To head off the problems associated with excessive wealth inequality (and particularly with having much of the society's wealth in the hands of people who've shown no particular talent), we'd do well to reform inheritance laws now, while there's still time before the Boomers start kicking the bucket in large numbers.
My preferred reform is to exempt a relatively small portion of an estate (e.g., set at 120% of the value of a median home, so that a typical person could leave the family home and personal effects tax free), with everything beyond that taxed as regular income for the heirs. So, for example, if someone died with an estate valued at $1 million, leaving it to three children, something around $275,000 would be exempted, with each heir then having around $242,000 in extra "income" to account for. To avoid having it be too harsh a hit, I'd allow the income to be pro-rated over the next decade, so that, in the described scenario, it would only increase taxable income by $24,200 per heir per year.
However, even short of that kind of comprehensive reform, just rolling the rules back to something more like we had in earlier eras would help. For example, starting in 1942, and throughout our economic golden age (the 50s and 60s), we had a fairly low estate tax exemption and graduated rates that rose as high as 77%. The exemption in that time was $60,000. If we adjusted that for inflation, from the late 60s to today, that would be like a $400,000 exemption today (instead of the sky-high exemption of $5 million we currently have). A $400,000 exemption would allow a fairly nice home and personal effects, or even a genuinely small business, to be handed down without worrying about tax.
Over the years, a number of changes to the estate tax were implemented to benefit the very rich, aside from just a vastly higher exemption and lower rates. In 1980, for example they retroactively repealed the "carry-over basis" rules. In effect, the rule directly before the repeal was that if you inherited property, your "basis" was what the prior owner had paid for it. For example, if someone bought stocks for $100 and then left them to you when they were worth $1000, and then you sold them for $1600, your capital gain would be on $1500 -- the actual capital gain those stocks had experienced. After 1980, you got "stepped up basis," so that you got to pretend you'd acquired the property for whatever it was worth when you inherited it, even though you had not, in fact, paid a dime, so that, in the prior example, you'd only pay capital gains taxes on the $600 of the capital gain that happened to occur after you were handed the stocks, thereby sheltering the majority of the gain from ever being taxed. By simply repealing this rule and going back to carried-over basis, we could reduce the accumulation of wealth by the very rich, while also enhancing revenues in order to cut the deficit. We would also reduce a distortion in the market, since currently the wealthy have an incentive to hold onto assets until they die, even if it would be more economically efficient to sell them, simply because if those assets have unrealized capital gains, those need never be taxed if they're inherited before being liquidated.
So, for example, say you own some land out west that you no longer have any use for, and which others have great use for, and you could really use the cash from selling it to help grow a business you have back east. But say the estern property has millions of dollars of unrealized capital gains, so you'll take a tax hit on it if you sell. The current code encourages you to sit on it until you die, and then your heir can immediately liquidate it tax-free. Meanwhile, the land is being under-utilized and your business is unnecessarily cash-starved. Without stepped-up basis, this isn't an issue, since the taxes will have to be paid sooner or later, by you or your heir, so you may as well make the move whenever it makes sense from a purely business perspective, rather than gaming the tax system.
Another change was letting spouses inherit tax free. It used to be that 50% of jointly owned property was subject to taxation upon the death of a spouse -- the idea being you were being taxed on the half of the property you'd received from your spouse, just as you'd be taxed for property you inherited from anyone else. That was changed so that spouses could inherit unlimited amounts tax free. This allows for multi-generational passage of wealth without tax. For example, a wealth old man can marry a young woman and leaves her all his money tax-free. Decades later, when she's a rich society matron, she can marry a boy-toy and leave him that money tax-free, and so on.
All these changes together resulted in estate taxes bringing in a much smaller share of total federal revenue. Estate and gift taxes brought in 2.3% of total revenues in the mid-1960s, and as of 2009 (in 2010, there was no estate tax), that was down to 1.1%, a decrease of over half. And because of that, the rule changes have played some role in sky-rocketing wealth inequality in this country. Simply by rolling back some or all of these rules to something closer to what we had in the 1960s, we could minimize the social damage tax-free and low-tax inheritance of large estates has been causing.
