Curb dynastic wealth with these tax ideas

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Melania Trump, with Barron Trump

In a blockbuster scoop, The New York Times recently reported evidence that presidential nominee Donald Trump could’ve legally avoided paying any federal income taxes for nearly two decades. In the following days, the candidate explicitly admitted as much.

Much of the ensuing national policy debate has focused on the American tax code, particularly the byzantine income tax strategies available only to very rich elites when they complete their annual tax returns. However, the case study offered by the Trump family’s tax avoidance trickery is on modern-day dynastic wealth. As the real estate developer’s former accountant and tax lawyer warned, “Here the guy was building incredible net worth and not paying tax on it.” Not only was Donald Trump born into luxury, he’s now amassing a fortune to pass along to his children — which will be even bigger under his own plan thanks to his huge tax cut for himself, if he becomes president.

That’s why taxes on dynastic wealth should be part of the policy debate, not just taxes on income. Of course, back in 1999, Donald Trump himself proposed a one-time wealth tax of 14.25 percent on net worth, raising $5.7 trillion in revenue. Earlier this year, the Washington Center for Equitable Growth highlighted two other ideas that should be included in the conversation:

Kamin proposes two fundamental reforms for federal wealth taxes. First, instead of taxing wealth transfers as an estate tax (which taxes the “donor” of the estate), we should tax the recipient of the inheritance through an inheritance tax. He cites a proposal by Lily Batchelder, also at NYU Law School, which, among other things, would consider the economic status of the individual inheriting the estate. That means that if the estate was divided up between many heirs, there would potentially be a lower tax bill than if the estate were taxed as a whole.

Kamin also proposes a wealth tax that is applied at regular intervals, such as the one that is suggested by Thomas Piketty at the Paris School of Economics and Emmanuel Saez at the University of California-Berkeley. Piketty and Saez argue that combining annual wealth taxes with an inheritance tax can better balance the economic trade-off between equity and efficiency compared to just using the inheritance tax alone. Taxing wealth on a recurring basis also could raise significant revenue: A 1 percent tax on wealth exceeding $20 million would raise $80 billion in 2012 alone. Over ten years, that number would exceed $1 trillion.

The recurring wealth tax proposed by Piketty and Saez may be more straightforward and easier to understand. For the Batchelder concept of replacing estate taxes with inheritance taxes, Bloomberg View offers this explainer

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.

…  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.

Commenting on the estate tax in 1889, famous industrialist baron Andrew Carnegie remarked: “Of all forms of taxation, this seems the wisest.” Given the spectacular resurgent rise of wealth inequality in America today, it’s time to revisit wealth tax ideas as we consider how to modernize our tax code — or at the least, reform them in response to egregiously exploitative tax code abuses now in the headlines. New reforms could even help finance changes to our national policies so that we can more effectively promote opportunity in America — such as giving all children a strong start and cushion in life, regardless of the family wealth they’re born into.

For more information, see “A new proposal to reform the U.S. estate tax,” The Washington Center for Equitable Growth (2016); “A Fair Way to Tax Dynastic Wealth,” Bloomberg View (2016); “What Should Society Expect from Heirs? The Case for a Comprehensive Inheritance Tax,” N.Y.U. Tax Law Review (2009); “Ten Facts You Should Know About the Federal Estate Tax,” Center on Budget and Policy Priorities (2016); “Use estate taxes to fund inheritance for all: Column,” USA Today (2016).