The Case for Scrapping the Estate Tax — and Replacing It With an Inheritance Tax

The Case for Scrapping the Estate Tax — and Replacing It With an Inheritance Tax

Americans will inherit more than $764 billion this year and pay an average of 2.1% in taxes on that income, according to a paper published Tuesday as part of the Brookings Institution’s examination of the tax code. The paper, by New York University law professor Lily Batchelder, notes that wealth transfer taxes accounted for 2.1% of federal revenues in 1973. This year, they are projected to account for 0.5%. The share of estates subject to the estate tax fell from 6.5% to a projected 0.1% over that same period.

Batchelder, a former adviser to President Obama, proposes to replace the current estate tax with an “inheritance tax.” It would treat inherited money above a certain level as ordinary income, requiring heirs to pay both income and payroll taxes on it.

The Urban-Brookings Tax Policy Center estimates that the proposal would raise $340 billion over the next decade if the lifetime exemption were set at $2.5 million, meaning it would hit just the top 0.02% of heirs. If the exemption was set at $1 million, the proposal would raise $917 billion, and if it was set at $500,000 — affecting just the top 0.18% of heirs — the proposal would raise about $1.4 trillion.

Batchelder says her proposal would reduce inequality and “take a large step toward leveling the playing field between income from inherited wealth and income from work.”

She also argues that her plan would more successfully build public support for taxing inherited income compared to the current estate tax.

“[T]he structure of an estate tax makes it easier for opponents to characterize it as a double tax on frugal, generous entrepreneurs who just want to take care of their families—even though nothing could be farther from the truth,” she writes. “Instead, the estate tax is the only tax that ensures wealthy heirs pay at least some tax on large amounts of inherited income, even if at much lower average rates than apply to income from good, old hard work. Nevertheless, inheritance taxes are more self-evidently ‘silver spoon taxes’ and, as a result, appear to be more politically resilient.”