There are more millionaires now in American history than there were in 1910. Unfortunately, this isn’t a totally good thing.
It’s true that the average American is more prosperous than they were 110 years ago with a higher standard of living, but the purchasing power of the dollar has dramatically decreased during that time as well. Thanks to inflation, more than 20 million Americans have a net worth of one million dollars or more, but to be wealthy like the millionaires of the past one would need about $30 million today.
In fact, many of today’s millionaires consider themselves middle-class, with their largest financial asset being their home. But the multi-millionaires that occupy Congress and the White House appear to be oblivious to this. President Biden wants to be a transformative president that will have the government be more involved in your life while spending a lot more money than the nation can afford under what he calls The Build Back Better Initiative. Part of this initiative is the American Families Plan, which calls for $1 trillion in new spending. Part of the funding for these programs will come from an expansion of the Federal Estate Tax that will widen the tax base to any estate worth $1 million or more.
A Brief History on the Estate Tax
Federal Estate Taxes existed briefly during the 18th and 19th centuries, but they disappeared before the Supreme Court ever had a chance to decide if they were constitutional. The modern Estate Tax was introduced in 1916 during the Progressive Era of American government when there was a large populist movement to tax the rich. This law did make its way to the Supreme Court in 1921 and it was ruled as constitutional, with the reasoning being that it was a tax on the transferring of property and not the actual property itself.
Currently, estates that are valued at less than $11.58 million are exempt from this tax. And because it only affects the very wealthiest Americans, most people are either unaware of it or they are in favor of it because it’s a tax that they are not paying.
A realized gain is when you sell an asset for more than you paid for it. If you bought 10 shares of a stock for $100 each and then later sold them for $110 each then you have a gain of $100. An unrealized gain is when you decide to keep the stock instead of selling it. Technically, the stocks are worth $1,100, but that gain is only on paper. It’s also possible that in the future, the stocks could be sold for less than $100 which would make it a realized loss.
What makes Estate Taxes extremely harmful to the people they affect, and the entire economy, is that this is a tax on unrealized gains which can result in the person inheriting the estate needing to sell it off in order to meet the government’s demand for their 40 percent of the cut.
For example, a farm that has been in the family for generations might have an appreciated value that crosses the exemption’s limit. Because it’s an unmovable piece of property, the family would need to sell it to pay the estate tax. Similarly, a profitable and privately owned business would be liable for the tax if the owner expectingly died and passed it on to his children. If the children didn’t have this cash available then they would need to liquidate, sell, or even shut down the business. Jobs would be lost, the government would lose corporate taxes from the business as well as income taxes from the people that worked there, and the community would be deprived of a good business that provided a valuable service.
While many families with means will plan their estates in such a way as to reduce the effect of death taxes, there are some instances where an unexpected tragedy can subject an estate to the full brunt of these taxes. For example, if a husband and wife are killed in a car crash and they have children under 10 years old, these newly orphaned kids will be forced to hand the state 40 percent of what their parents left them.
It has also been said that as a source of revenue, the current estate taxes do not add much to the treasury and they might even cost the government more than they bring in. Estate planning to reduce the tax bill your heirs will have to pay is tax-deductible. Also, the cost of enforcing compliance might even outweigh the revenue that comes in. But for many who support Estate Taxes, it’s not about the revenue, it’s about redistributing wealth so that large amounts are not concentrated in the hands of a minority.
When You Become the Tax Base
The purpose of taxes is to provide revenue for the operation of the government. The fact that Estate Taxes do not effectively meet that purpose and are instead punishments for accumulating wealth in the name of being progressive should be disturbing to Americans.
Most ordinary Americans never thought or cared about Death Taxes because it didn’t affect them and/or they believed messaging that the rich need to pay their “fair share.”
Now that devaluing the currency has caused many Americans to become millionaires, they’re going to suddenly find themselves subject to this tax if President Biden gets his way.
This article, Why the Middle Class Should Start Paying Attention to the Death Tax, was originally published by the Foundation for Economic Education and appears here with permission. Please support their mission.