Making the Tax Code Safe for America’s Aristocracy
Tax-free gifts are solidifying the nation's financial dynasties.
Can a democracy survive if its richest people can pass on to their heirs, generation after generation, the vast bulk of their fortunes?
In the United States, that question first became a top-tier topic of debate back over a century ago. Huge fortunes were then towering over the nation’s economic landscape. These fortunes, Americans feared, were fueling financial dynasties that could wreck our democracy.
How could America prevent that ruin? The nation needed, Americans came to agree, to tax the fortunes the super-rich bequeathed to their heirs.
America, President Theodore Roosevelt declared in 1906, must place “a constantly increasing burden on the inheritance of those swollen fortunes which it is certainly of no benefit to this country to perpetuate.”
A decade later, Congress enacted a federal tax on the grand fortunes the rich left behind at death, and this new estate tax would eventually have White House support from Republicans and Democrats alike.
Vast “inherited economic power,” as President Franklin D. Roosevelt opined in 1935, “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.”
Any society that tolerates a “fabulously wealthy” class, President Dwight Eisenhower would add in 1960, is asking for trouble.
“Since time began,” Ike reminded America, “opulence has too often paved for a nation the way to depravity and ultimate destruction.”
Depravity and destruction, here we come. A dozen years ago, America’s elected leaders started hacking away at federal estate taxation. The budget deal struck at the end of 2010 hacked some more, and our latest last-minute budget deal — the “fiscal cliff” bargain — has now locked all this hacking in place. Our rich today can now do exactly what Teddy Roosevelt warned us against. They can easily “perpetuate” their “swollen fortunes.”
The fiscal cliff deal allows an individual wealthy person to leave behind, tax-free, the same $5 million the 2010 tax deal wrote into the tax code. But this $5 million gets adjusted annually for inflation. In 2013, the exemption will hit $5.25 million. This $5.25 million, in turn, only applies per spouse. A wealthy couple will be able to totally exempt $10.5 million from estate taxation. Fewer than 4,000 households are expected to cross that threshold in 2013.
Even this arithmetic doesn’t tell the full story.
Decades ago, Congress realized that dynastic fortunes would flourish if the rich could avoid estate tax liability at death by giving away, while still living, the bulk of their fortunes to heirs. The solution: the federal gift tax.
The gift tax and the estate tax work in tandem. The gifts the wealthy give to their heirs during their lifetimes get subtracted from the total estate tax exemption. In 2013, a wealthy couple that has bestowed $2 million in gifts will only get to exempt, at death, another $8.5 million.
Or so the theory goes. In reality, the rich can “gift” their way to a much greater estate tax exemption. In 2013, the gift tax will only kick in when a single wealthy person gives a single individual more than $14,000 within a single year.
A wealthy couple, under this lucrative loophole, can together give $28,000 a year to as many individuals the two spouses choose, for as many years as they want, and face no gift tax. A CEO with two grown children and four grandkids, for instance, can gift $168,000 a year to these six nearest and dearest without paying any taxes at all on these presents.
And those six nearest and dearest? They don’t have to pay a penny of tax on that $168,000. They don’t even have to report the $168,000 on their tax returns. Nor will these six heirs face any taxes on — or have to report — the additional mega millions they’ll eventually inherit.
We’re letting, in other words, our grandest fortunes swell without any reasonable limit. Our progressive forebears didn’t accept that swelling. Neither should we.