Andrew BratslavskyEditor-in-Chief

One of the hot-button issues of the 2020 presidential election is the prospect of a wealth tax.  This controversial policy proposal is a central talking point of White House hopefuls, Senators Bernie Sanders and Elizabeth Warren, who advocate levying a tax on America’s highest-income households.  For example, Senator Warren proposes a 2% tax on households with assets over $50 million, and a 3% tax for those above $1 billion.  By contrast, Senator Sanders’ proposal, though similar in application, includes more tax brackets that would pull in lower income thresholds.

But while proponents argue that a wealth tax would increase revenue and close the income inequality gap, others wonder if this policy—sure to face an uphill battle in D.C.—is really necessary. In fact, some question the wisdom of wrangling for a wealth tax instead of refining what already exists: the federal estate tax (facetiously known as the “death tax”).*

Under current law, only those with an estate north of $11.4 million are on the hook for an estate tax at death (that number doubles to $22.8 million for married couples).  In 2026, however, the current estate tax threshold will sunset to $5 million ($10 million for married couples, although both numbers will be subject to inflation adjustments) unless Congress says otherwise.

To better grasp the mechanics of the estate tax, it is useful to recognize the tax policies on both sides of the aisle. Republicans generally favor lower taxes, resulting in a higher estate tax threshold (as the current law reflects). Democrats, on the other hand, generally favor higher taxes, resulting in a lower threshold.  Naturally, the majority party in Congress influences the trajectory of this threshold.

So, with a system for taxing the wealthy already in place, the question remains: is it adequate?  For context, the Tax Policy Center estimated that about 1900 households paid an estate tax in 2018 (for more context, there were roughly 128 million households in the same year).  What is more, the estate tax is notorious for having several strategic loopholes. This allows clever estate planners to significantly reduce, or even avoid, the estate tax.  For these reasons, advocates of the wealth tax argue that the estate tax is too lenient to generate any substantial revenue.

To that end, if Congress returns to a Democratic majority in 2020, they may consider lowering the estate tax threshold to include more taxable estates, while also eliminating or narrowing certain loopholes.  Rather than establishing a new and separate tax, this option seems to be a more pragmatic path to creating the revenue that Senators Warren and Sanders long for.

In essence, the notion of taxing the wealthy is by no means novel.  The estate tax, warts and all, is a virtual equivalent of a theoretical wealth tax.  But whether the estate tax really works depends on which side of the aisle one sits. Ultimately, what happens with a potential wealth tax, or a possible amendment to the current law, will not come without the requisite fireworks on Capitol Hill.

*The estate tax is not the only form of taxing the wealthy.  Two other examples are seen at the state level: (1) the inheritance tax (currently, six states impose a tax on the transfer of wealth), and (2) the property tax (requiring a homeowner to pay a set percentage of the value of their home).