United States: Democrats Turn To Tax Reform To Reduce Wealth Disparity

Last Updated: April 12 2019
Article by Nina Krauthamer

The U.S. Federal deficit is expected to reach $1 trillion in 2019. Meanwhile, a hedge fund billionaire recently purchased a New York City condominium for $238 million, and it is estimated that the top 0.1% possess almost the same amount of wealth as the bottom 90% of all households.

When it comes to tax policy, Democrats have traditionally focused on tax relief, including a negative income tax, for poor and working-class families.1 Several recent pronouncements and extensive press coverage indicate a new approach, designed to tax the wealthiest individuals at significant rates of tax.

Three progressive Democrats have made the news in recent days – Senators Sanders and Warren and Representative Ocasio-Cortez. These proposals, if enacted, would raise the marginal income tax rates and capital gains rates, increase the estate tax rates, lower the lifetime exemption, and add a wealth tax.

THE SANDERS PROPOSALS

2017 Proposal

Senator Bernie Sanders (D-V.T.) presented a white paper on "Options to Finance Medicare for All" in 2017. In that paper, Sanders suggested the following:

  • Impose higher marginal income tax rates:2

    • 40% on income between $250,000 and $500,000
    • 45% on income between $500,000 and $2 million
    • 50% on income between $2 million and $10 million (In 2014, only 136,000 households, the top 0.1% of taxpayers, had income between $2 million and $10 million.)
    • 52% on income above $10 million (In 2014, only 16,700 households, just 0.02% of taxpayers, had income exceeding $10 million.)
  • Eliminate special reduced rates for capital gains and qualified dividends.
  • Introduce higher graduated estate tax rates to replace the current 40% flat tax:

    • 45% for the value of an estate between $3.5 million and $10 million
    • 50% for the value of an estate between $10 million and $50 million
    • 55% for the value of an estate in excess of $50 million
    • An additional 10% surtax would apply to estate value in excess of $500 million ($1 billion for married couples)
  • Eliminate common estate planning techniques, such as G.R.A.T.'s (grantor retained annuity trusts) and dynasty trusts:

    • A G.R.A.T. is an irrevocable trust that pays an annual annuity to the grantor (creator) of the trust. If the grantor dies during the term of the trust, the assets are included in the grantor's estate. If not, the assets pass to the beneficiaries with no gift tax other than the gift tax paid at inception. If the assets have appreciated in excess of the I.R.S. assumed rates of return (which is often the case with successful startup companies), that "excess" appreciation will pass to beneficiaries free from estate or gift taxes.
    • Dynasty trusts are long-term trusts designed to reduce estate, gift, and generation-skipping taxes at each generational level, thereby allowing accumulations of wealth for generations.
  • Impose a wealth tax on the top 0.1%:

    • An annual 1% Federal wealth tax would apply to the wealthiest 0.1% of U.S. households.
    • The tax would apply to the net worth exceeding $21 million for a household (essentially those individuals that would be subject to the current U.S. estate tax). A household with $21.5 million would pay 1% of $500,000, or $5,000.

2019 Proposal

Senator Sanders recently announced that he would introduce a bill "For the 99.8%" Family farmers would be offered a special exclusion from estate tax of up to $3 million, and the conservation easement would increase to $2 million. The bill would also include the following proposals:

  • Impose higher marginal income tax rates:

    • Reduce the amount exempted from estate tax to $3.5 million (the exemption in effect in 2009 and a reduction from the current $11.4 million), which would affect 0.2% of all Americans.
    • Increase the estate tax rate to 45% for estates between $3.5 million and $10 million.
    • Increase the estate tax rates on bigger estates, so that estates worth between $10 million and $50 million would be taxed at 50%, estates of more than $50 million would be taxed at 55%, and estates in excess of $1 billion would be taxed at 77% (the top rate for 1941-1976).
  • End tax breaks for dynasty trusts.
  • Strengthen the "generation-skipping tax," by applying it (with no exclusion) to any trust established to last more than 50 years.
  • Limit the use of G.R.A.T.'s and "intentionally defective grantor trusts," both techniques commonly used to reduce gift taxes on transfers to beneficiaries.
  • Close the valuation discount "loophole."

Footnotes

1 Senator Kamala Harris (D-C.A.) has, for example, proposed the Lift the Middle Class Tax Act. The proposal would provide a refundable tax credit of $6,000 for married couples earning up to $60,000 a year. Single filers making up to $30,000 and single parents earning up to $80,000 would get a credit of $3,000. The credit would then start to phase out. Couples and single parents with earnings of more than $100,000 and single filers making more than $50,000 would no longer be eligible.

2 The current highest Federal rate is 37%.

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