The federal estate tax has long stood as a fiscal tool aimed at mitigating wealth concentration by taxing a portion of the assets bequeathed by an individual upon their death. The effect of the estate tax is best illustrated in an example of its absence. Let’s use former New York Yankees baseball team owner George Steinbrenner as an example. Steinbrenner died in 2010 during a period where there was no federal estate tax. The rate was 45% the year prior and 55% the year after. Steinbrenner saved his inheritor sons at least $495 million dollars. The Steinbrenner case underscores the substantial financial implications at the individual level, and the broader role of the estate tax in curbing wealth concentration.
Estate Tax Gap Year The estate tax technically predates the Revenue Act of 1916 in the form of ad-hoc taxes to fund specific expenditures. But the 1916 law enshrined it as a permanent—or perhaps more accurately, mostly permanent—fixture in American tax policy. The act established varied rates, ranging from 1% to 10%, depending on the net value of a given estate. The rates were adjusted in subsequent years, as when the Revenue Act of 1924 raised the estate tax rate to 40% and established a gift tax to curb the avoidance of the estate tax, but the overarching structure remained largely the same. The estate tax rate reached a zenith during World War I, with the highest bracket topping out at 77% on estates over $50 million. The rate then steadily declined, and a formal phased reduction was introduced in 2001. Ultimately, the tax was repealed in its entirety for the 2010 tax year, with a planned return to pre-2001 rates in 2011, absent congressional intervention. Intervention didn’t come in time. Those who died in 2010 were uniquely able to pass on their wealth unfettered by concerns of wealth redistribution. At the time of his death, George Steinbrenner was worth about $1.1 billion—mostly owing to his holdings in the YES Network, a television network that primarily airs New York Yankee baseball games. Applying that number either to the estate tax rate in 2009, 45%, or the rate in 2011, 55%, we get a tax bill of $495 million to $605 million. Taking the halfway point between the above estate tax range—and assuming the Steinbrenners invested just the tax-saved $550 million in a conservative investment vehicle, such as an index fund keyed to the Dow Jones Industrial Average—their investment would be worth just shy of $1.3 billion today. A more speculative investment, such as Apple Inc., would see their holdings balloon to $28 billion. For perspective, the Yankees themselves are the most valuable MLB team, coming in at just $7.1 billion. With some sound investment advice, the Steinbrenner brothers would have enough money to buy a pinstripe-clad baseball team for each of them, and a third in case one gets stuck on the roof. The Steinbrenner example serves as a compelling illustration of an economic reality without the wealth redistribution of the estate tax. Absent a mechanism to break up concentrations of wealth between generations, the financial positions of one generation set the positions of successive generations. Families with more resources to invest can grow their wealth further and, potentially, to the exclusion of others. Over less than a decade and a half, the savings on a lapsed estate tax can rise to and surpass the level of the underlying estate itself.
Combating Wealth Inequality The lifetime estate and gift tax exemption was doubled under the Tax Cuts and Jobs Act of 2017 to $11.18 million for individuals and $22.36 million for couples, from $5.6 million for individuals and $11.18 million for couples. This increase is set to expire after 2025. Even just the temporary increase in the individual exemption will cost the federal government $72 billion in revenue, further highlighting the importance of the estate tax as a generator of tax revenue. An analysis by the Penn Wharton Budget Model concluded that a hypothetical scenario in which the aforementioned estate tax cuts weren’t made would have resulted in nine times the revenue generation and 100 times the number of taxable estates over that period—substantially increased revenue through both an increased rate and a widened tax base. Considering that wealth inequality has been rising for decades, it’s imperative to strengthen mechanisms in tax policy that foster a more equitable economic landscape. The estate tax stands as our most potent tool in this endeavor, absent the political viability of a US wealth tax. Its efficacy has been diluted over the decades due to increasing exemptions and diminishing rates, to say nothing of the “gap year” of 2010. The Steinbrenner windfall illuminates the vast potential for wealth preservation that high-net-worth individuals can leverage given the legislative opportunity. The TCJA’s expiration provides an opportunity to reevaluate and restructure the estate tax framework—starting with lowering the exemption thresholds, aligning it more closely with its original intent, and placing it on a competitive footing with similar tax policies internationally. Reducing the exemption threshold and raising the rates to a point more competitive by historical standards would be a major step toward reining in the growing wealth disparity. Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social To contact the editors responsible for this story: Melanie Cohen at mcohen@bloombergindustry.com; Daniel Xu at dxu@bloombergindustry.com
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