Despite protests in the street and pleas from Capital Hill, President Donald Trump has yet to reveal the amount he has–or has not–paid in taxes. But he plans to overhaul the U.S. tax code, and on Wednesday, he announced a one-page tax plan to accomplish that. Here is what you need to know.

What’s New?

In short: a range of tax cuts and some efforts to simplify the filing process. Trump’s tax plan, which will likely receive heavy edits as it makes its way through Congress, would reduce the number of individual tax brackets from seven to three–10 percent, 25 percent, and 35 percent. The proposal does not yet specify the income thresholds for each bracket. Currently, people in the top income bracket are taxed at a rate of almost 40 percent and those in the lowest bracket pay 10 percent, which would remain the same under Trump’s plan. While Americans overall would likely receive some sort of a tax break, the wealthiest Americans would benefit the most.

In addition, Trump’s plan would lower the corporate tax rate–and make it apply to small mom-and-pops and giant multinationals alike–from 35 percent to 15 percent. That would put the U.S., which currently has the highest corporate rate of any industrialized nations, in line with Germany and Canada, and slightly below Britain.

Another major change included in the plan: killing the “death tax,” aka the inheritance or estate tax. As of 2014, the U.S. inheritance tax–up to 40 percent for some estates–was the fourth highest in the world. Trump’s plan would scrap that tax–which supporters say is a key tool for redistributing income, and critics say unfairly steal from the rich–entirely.

What About the Debt?

Under Trump’s proposed tax overhaul, the national debt would skyrocket. At a press conference unveiling the plan, Treasury Secretary Steven Mnuchin said the plan “will pay for itself with growth.” Since the revenue from taxes would drop, the government would need to find other ways to obtain money to pay for its various obligations. But a variety of nonpartisan budget think tanks and analysts projected that previous versions of Trump’s plan would cause the federal deficit to balloon.  

The Committee for a Responsible Federal Budget–a think tank that focuses on fiscal responsibility–predicts that the plan would add $3 to $7 trillion to the deficit over a decade. That would contradict Trump’s vociferous critiques of the rising debt under the past few administrations. History does not bode well for self-paying tax cuts–the idea that tax cuts would spur enough economic growth to balance out revenue lost due to lower rates. President Ronald Reagan’s tax cuts in 1981, for instance, contributed to the deficits that would follow.

What Do the Experts Think?

Bernard Baumohl, the chief global economist at the Economic Outlook Group: “The effort to introduce more fiscal stimulus into the economy is genuinely underway […] But the bare bones plan we saw unveiled [on Wednesday] is already conceptually flawed and unlikely to go far in Congress. The final product will bear no resemblance to the principal points highlighted in today’s meager release. Certainly, the first step in this process was unimpressive.”

JPMorgan Chase Analyst Jesse Edgerton: “Although the plan’s lack of detail makes estimating its revenue effects uncertain, we suspect the plan would be scored as dramatically increasing deficits, making likelihood of its passage through Congress slim […] the recent announcement is likely best viewed as an opening offer in a negotiation with many rounds to go.”

Economist Doug Holtz-Eakin, head of the Congressional Budget Office under former President George W. Bush: “Passing genuine tax reform would include structural changes. As long as those are not included, it is not reform. This bill as presented would add to the deficit. Growth alone cannot account for the loss of revenue from tax cuts. This means it cannot pass the reconciliation process and will not be able to become law.”

Alec Siegel

Alec Siegel is a staff writer at Law Street Media. When he’s not working at Law Street he’s either cooking a mediocre tofu dish or enjoying a run in the woods. His passions include: gooey chocolate chips, black coffee, mountains, the Animal Kingdom in general, and John Lennon. Baklava is his achilles heel. Contact Alec at ASiegel@LawStreetMedia.com.

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The estate tax, more commonly known as the “death tax,” is one of the most hated taxes in the United States. Long considered to be a contentious issue in the tax policy field, Americans are largely not comfortable with the concept of taxing inheritances. However, estate taxes align perfectly with America’s historical idea of fairness and not encouraging wealth to accumulate long after death. Despite citizens’ contempt for taxes at death, few will ever actually be subject to the estate tax. Read on to learn more about the estate tax, and what happens to our money after we die.

Evolution and History of the Estate Tax

The Internal Revenue Service defines the estate tax as “a tax on your right to transfer property at your death.” Taxation at death can be traced back as far as ancient Egypt, around 700 B.C. In feudal Europe, it was also quite common to impose taxes on the death of a family member, normally amounting to a family’s annual property rent.

Early American government abolished laws that encouraged the accumulation of wealth over many generations. In 1777, Thomas Jefferson cited Adam Smith, a free market capitalist, when stating that “the earth and the fulness of it belongs to every generation, and the preceding one can have no right to bind it up from posterity.” The concept that people should control their estates after death was considered “manifestly absurd” by both Jefferson and Smith.

The modern estate tax evolved through the Stamp Tax of 1797 (taxes levied on required federal stamps on wills, inventories, and letters of administration), the Revenue Act of 1862 (the addition of a legacy or inheritance tax along with the stamp tax on the probate of wills or letters of administration), and the War Revenue Act of 1898 (a federal legacy tax proposed to raise revenue for the Spanish-American War, levied only on personal property).

The Estate Tax 1900 to Present

The Revenue Act of 1916 specifically created a tax on the transfer of wealth to beneficiaries. This levied a tax directly on the estate itself, rather than an inheritance tax. Over the next few decades, laws surrounding the estate and gift tax framework shifted immensely. A gift tax was repealed in 1926, then reintroduced in 1932; tax bases expanded; life insurance rules were modified to exclude insurance the decedent never owned; and marital deductions frequently changed. Significant tax law changes came around with the Tax Reform Act of 1976. This created a unified estate and gift tax framework; prior to this reform, it was far cheaper to give property away during life as gifts, as there was a higher tax rate applied at death. The generation-skipping transfer trust tax was also added to combat creative trust frameworks that paid money out to intervening beneficiaries, avoiding taxes altogether.

The Economic Growth and Tax Relief Reconciliation Act of 2001 allowed for a phasing-out of the estate tax, along with a lowering of annual top-rate estate taxes. It also lowered capital-gains taxes, in addition to lowering income taxes. Much of the resistance to the estate tax has come from powerful public relations campaigns and lobbying efforts. Many wealthy families have lobbied for years around an estate tax repeal and funded actions to make it a reality: including the Mars Chocolate family, the L.L. Bean family, and the Campbell’s Soup family.

The “Death Tax”

While citizens feel very strongly about the “death tax,” it only affects a small percentage of families each year. According to a 2016 Gallup poll, 54 percent of those polled supported a repeal of the estate tax. Under the current law, however, the 40 percent tax rate is applied only to estates worth more than $5.45 million for individuals and more than $10.9 million for married couples. If a decedent has an estate worth less than that, then it is automatically passed on to heirs completely tax-free. Additionally, individuals are able to give away $14,000 a year as a gift to an unlimited amount of people without incurring any tax.

So, an overwhelming majority of families in the U.S. are not subject to the estate tax. For example, in 2015, only 4,918 estates were subject to the tax, yielding $17 billion (less than 1 percent of federal revenue). From that number, 266 estates valued at $50 million or more brought in $7.4 billion in revenue. According to the Center on Budget and Policy Priorities (CBPP), 99.8 percent of estates are exempt from the estate tax. The CBPP also notes that $275 billion will be generated from 2017-2026 under the current estate tax law. While that is still less than 1 percent of federal revenue during that same period, it is more than the government will spend on the Food and Drug Administration, Centers for Disease Control and Prevention, and Environmental Protection Agency combined. Estate taxes clearly remain an integral source of revenue for the federal government.

Moreover, the interesting thing about many estates is that most will not ever actually be taxed. The CBPP estimates that 55 percent of the value of the estates worth more than $100 million are comprised of unrealized capital gains; those gains have not yet been taxed nor will they ever be taxed under current estate tax laws. Capital gains are only taxed when an owner of an asset “realizes” a gain; therefore, if an asset is held by an owner until death, increasing in value over the years, it will never actually be subject to income tax.

Generally, taxable estates pay less than one-sixth of their value in tax–roughly 16.6 percent, far below the top statutory rate. Additionally, the significant number of loopholes and generous deductions enable many estates to avoid taxes altogether. Hence, many families are able to pass on numerous assets to future generations tax-free due to advantageous laws.

Estate Tax Repeal

Republicans have long sought to repeal the death tax, and now thanks to President Trump, that dream may be realized. Abolishing it completely would save millionaires and billionaires in the U.S. roughly $20 billion a year in taxes. An action to repeal the estate tax would be beneficial only for the top 1 percent of families in the country, something that appears to be completely at odds with the working-class voters who helped to elect Trump. Under the current administration, passage of a bill to repeal the estate tax in the Republican-led House is practically certain; as for the Senate, a decade-long repeal is possible under a reconciliation which needs 50 senators. To repeal the estate tax permanently, 60 votes would be needed, which may be more difficult to garner.

“Donald Trump” Courtesy of Gage Skidmore : License: (CC BY-SA 2.0)

Opponents of the estate tax have contended that it hurts family farms and small businesses immensely. In reality, very few small businesses and farms owe any estate tax in a given year. In 2013, only roughly 20 small businesses and small farm estates were subject to the estate tax, and estimates show that those estates only owed about 4.9 percent of their value in taxes.

If repealed, President Trump’s estate alone would save about $564 million, based on his estimated net worth of $3 billion (although he has argued that his net worth is even higher). Trump’s team, which is comprised primarily of extremely wealthy individuals, would also benefit greatly from an estate tax repeal. However, a proposed plan to repeal the estate tax indicates a bit of compromise as well. Instead of capital gains being able to pass to heirs tax-free, those assets would be subject to a capital gains tax at death, with an exemption of the first $10 million in assets for family farms and small business owners. A tax on capital gains would only top out at 20 percent, while the estate tax is at 40 percent. Thus, repealing the estate tax and replacing it with a capital gains tax would be extremely beneficial for wealthy families. 

Conclusion

The estate tax is misunderstood by most Americans; despite all of the negative sentiments surrounding it, only a minuscule number of estates will be affected by it annually. In actuality, a repeal of the estate tax would only benefit a small number of incredibly wealthy families in the U.S., while simultaneously depriving the federal government of billions of dollars of revenue each year. When weighing the merits of the estate tax system, one should consider the benefits of allocating society’s resources and promoting equality over the potential consequences of binding the majority of assets and wealth into a small percentage of the American population.

Nicole Zub

Nicole is a third-year law student at the University of Kentucky College of Law. She graduated in 2011 from Northeastern University with Bachelor’s in Environmental Science. When she isn’t imbibing copious amounts of caffeine, you can find her with her nose in a book or experimenting in the kitchen. Contact Nicole at Staff@LawStreetMedia.com.

The post Death and Taxes: What is the Estate Tax? appeared first on Law Street.

On Monday afternoon, a billionaire prescribed angry American workers a path to the middle class in a city the recession pummeled harder than pretty much any other. Donald Trump, the Republican presidential nominee, gave his most detailed speech on his economic plan yet, in front of protestors, supporters, and press at the Detroit Economic Club.

As protestors punctuated his hour long speech, in which he was introduced by his running mate Governor Mike Pence (R-IN), Trump aimed to shift the focus from his recent blunders to his beliefs on how America should move forward. Here is what you need to know about where Trump plans to steer the economy, with some fact-checking for good measure:

Taxes

For one, Trump railed against the estate tax: “American workers have paid taxes their whole lives, and they should not be taxed again at death,” said the man who inherited undisclosed millions from his father. He promised to abolish the estate tax, which he said “is just plain wrong.”

Trump’s tax plan seemed to try to placate disillusioned low-income earners without completely ignoring those who are in the highest tax bracket. Private income, under Trump’s plan, would be taxed in three brackets: 12 percent, 25 percent, and 33 percent. “The rich will pay their fair share, but no one will pay so much that it destroys jobs or undermines our ability as a nation to compete,” he said, promising that many Americans–presumably those who earn below a certain threshold–would not pay any income taxes.

Inaccuracies

It’s no secret at this point that Trump throws falsehoods around often and enthusiastically. That’s not to say Clinton doesn’t do her share of fibbing, but per PolitiFact, an independent fact-checking website, the two are hardly in the same stratosphere: 53 (or 22 percent) of Clinton’s statements this campaign season have been completely true, while only nine of Trump’s (four percent) statements could be considered foolproof. His speech on Monday, though prepared, treated facts lightly at some points.

A touchstone of Trump’s success so far has been his stance on trade deals, namely that they are “terrible” and he’d “rip them up” if elected president. NAFTA, drafted by President George H.W. Bush and supported by Bill Clinton, is one of Trump’s go-to targets.

“According to the Bureau of Labor Statistics, before NAFTA went into effect there were 285,000 auto workers in Michigan. Today, that number is only 160,000 auto workers,” Trump said on Monday.

Auto manufacturing jobs have indeed been on a decline in America, especially in the “Motor City,” Detroit. But Trump implies NAFTA is the sole culprit of those job losses. The Congressional Research Service conducted a study in 2015 on NAFTA, and found that while certainly some auto industry jobs were lost to cheaper labor in Mexico, it’s also certain that many of the job losses can be explained by increased productivity due to technological advancements.

For more fact-checking on Trump’s speech, click here.

Clinton

Here is how Trump framed the two options Americans will face in November: “She is the candidate of the past,” he said of Clinton. “Ours is the campaign of the future.” While they both are technically candidates of the present, Trump looked to portray Clinton and her platform as tired, worn out, and his own as bold, ready to “jump-start America.”

Again, some of his criticisms aimed at Clinton were related to trade. He mentioned her support for NAFTA and said she would likely support the Trans-Pacific Partnership–her official stance is against the TPP, but she did support it in the past–a 12-nation trade deal that is stalled in Congress at the moment.

Trump dismissed Clinton’s economic vision, which she will flesh out on Thursday, also in Detroit. Clinton, during a rally in St. Petersburg, Florida, shot back, saying his plan equated to a re-packaged version of Ronald Reagan’s trickle-down economics: “Now, you know that old saying, ‘Fool me once, shame on you, fool me twice, shame on me?'” she said. “Trickle down economics does not help our economy grow. It does not help the vast majority of Americans.”

With Clinton set to unveil her economic vision for America on Thursday, hopefully the focus will shift from lofty rhetoric to detailed ideas so voters can focus their energy on the things that matter.

Alec Siegel

Alec Siegel is a staff writer at Law Street Media. When he’s not working at Law Street he’s either cooking a mediocre tofu dish or enjoying a run in the woods. His passions include: gooey chocolate chips, black coffee, mountains, the Animal Kingdom in general, and John Lennon. Baklava is his achilles heel. Contact Alec at ASiegel@LawStreetMedia.com.

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