The Republicans' attitude to wealth could cost them power

(Credit Image: Public Domain)

Henry Olsen

February 6, 2018 4 mins

Wealth creation is the Republican Party’s modern raison d’être. But they don’t only want entrepreneurs to create more wealth for everyone, they also want the already wealthy to keep a much greater share of wealth for themselves. A clear indication of this can be seen in their plans for an obscure part of American tax code called “step up basis”.

America’s federal government has levied an inheritance tax against the value of a dead person’s estate since 1916. The recently passed tax reform bill established that the first $11.2 million of a person’s estate is completely exempt from this tax. A married couple that plans ahead can effectively double this amount to $22.4 million. Anything above that is taxed at rates of up to 40%.

“Step up basis” is a provision intended to protect heirs from double taxation. It establishes that bequest recipients have the value of their gifts “stepped up” to the good’s value at the time of the donor’s death. If this were not done, the government would effectively get two bites at the tax apple: first a share of the value of the good at a person’s death, and then again on any gains the recipient would get when they sell the good. Step up basis is fair in the context of an inheritance tax as it means the government taxes profits once and only once.

Step up basis is fair in the context of an inheritance tax as it means the government taxes profits once and only once

Many Republicans, however, want to repeal the inheritance tax and keep step up basis. Indeed, the bill passed by the Republican-controlled House last fall included this provision. Nor is this the first time the House has tried to do this: it passed a bill eliminating the inheritance tax while keeping step up basis on a nearly party line vote in April, 2015.

If this combination were to ever become law, America’s wealthiest individuals would effectively pay no tax on the billions of dollars they had saved over the course of their lifetimes. Their estates would not be taxed because of the inheritance tax’s elimination, and their heirs would pay no tax on the accumulated gains on the investments or property they received. Hundreds of billions of dollars would go untaxed, giving billionaires a massive tax break.

Republicans march on Capitol Hill to call on the Senate to eliminate the death tax (Photo by Alex Wong/Getty Images)

The amounts at stake are simply mind-boggling. According to Forbes’ daily updates of the net worth of the planet’s richest people, the ten wealthiest Americans have estates of approximately $692 billion.¹ Assuming, for the sake of argument, that only about half of that amount represents unrealised gains on their investments, that means nearly $350 billion would never be taxed at all under the House GOP approach.²At the current effective capital gains tax rate of 23.8%, that means the federal government would lose nearly $74 billion in tax revenue.³

Left-wing groups and activists predictably decry this as a giveaway to the rich. Right-wing groups and activists, however, don’t even note this possibility exists. During my research, I was unable to find a single mention of an anti-tax or right-wing group analysing or justifying this policy. There are plenty of justifications for the elimination of the inheritance tax, or the ‘death tax’, but not a single one explaining why coupling this with stepped-up basis retention is fair.

There are plenty of justifications for the elimination of the inheritance tax, or the ‘death tax’, but not a single one explaining why coupling this with stepped-up basis retention is fair

Perhaps that’s because it is an article of faith among many Republicans that the capital gains tax rate should be zero to begin with. The Tax Foundation, for example, is a very influential group on the American right and it endorses this idea.⁴ Grover Norquist’s Americans for Tax Reform, the single most important group favouring tax reform, has long called for a zero % capital gains rate.⁵

If you don’t think that capital gains should be taxed, then the enactment of such a policy by stealth for the uber-wealthy won’t trouble you one bit.

It’s one thing to stop death from being a taxable event. It’s quite another to make death a ‘get out of tax free’ card for the Davos set

Cooler political heads have thus far kept this proposal from becoming law. Polls have regularly shown that Americans think the economic system already favours the wealthy and that tax rates should be raised on the rich. They wouldn’t be thrilled to learn that a party had exempted the super-rich from paying taxes at all. “Make America Great Again” is a popular slogan: “Make Aristocracy Great Again” is not.

The attitude behind the tax proposals, however, continues to dominate economic thinking on the American right. As such, it drives a further wedge between the Right and the increasing number of Americans who believe they do not benefit from the modern global economy. It’s one thing to stop death from being a taxable event; Americans think that’s only fair. It’s quite another to make death a “get out of tax free” card for the Davos set. A party that continues to listen to this siren song should not be surprised when one day they look up to find the Left firmly ensconced in power.

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FOOTNOTES

See ‘The World’s Billionaires: today’s winners and losers’, Forbes, accessed 3 February, 2018.
The Federal Reserve estimates that 55 % of the value of estates in excess of $100 million consists of unrealized capital gains. See ‘Why the death tax may not matter any more’, Bloomberg, 31 October, 2017.
Following the passage of the 2017 tax bill, the highest tax rate on long-term capital gains is 20 %. An additional 3.8 % is imposed for people earning over $200,000 under what is called the “net investment tax”. See ‘The tax bill is finalized‘, Forbes, 16 December, 2017.
See ‘Standard economics says capital in come taxes should be zero‘, Tax Foundation, 14 April 2013
See Supercommittees should not hike capital gains rate, Americans for Tax Reform, 24 October 2011. ATR once sponsored a zero % capital gains rate caucus among Congresspersons and Senators. See ‘Zero capital gains tax caucus adds eight new members’, Americans for Tax Reform, 7 March 2002. See also Interview with Grover Norquist, American Bar Association Quarterly, Spring 2011 (ATR founder and President Grover Norquist says “you get rid of capital gains tax, good.”).

Henry Olsen is Editor of UnHerd.com’s Flyover Country theme and a Senior Fellow at the Ethics and Public Policy Center in Washington, DC. He is the author of ‘The Working Class Republican: Ronald Reagan and the Return of Blue-Collar Conservatism’.