The Moore v. United States case is a battleground invoking heated debates over the income realization necessity for taxation. Charles and Kathleen Moore’s victory would shake up many aspects of the current tax code and, likely, obstruct any future ideas of a wealth tax.
The estate tax alone, however, would remain unaffected. Financial experts have argued that this particular form of tax could be precisely the tool for addressing wealth inequality, providing a substantially more viable, albeit less sensational, alternative to the wealth tax.
The estate tax’s potential lies in its operational feasibility and practicality, identifying it as a tool for reform rather than revolution. The focus of the Moore case on the necessity of “realization” for taxation supports this notion. In simple terms, realization refers to when gains from assets like stocks are taxed, traditionally only when those assets are sold and the gains are “realized.”
Current wealth tax proposals are rooted in the constitutionality of taxes applicable to unrealized gains. A win for the Moores would upend these proposals for the foreseeable future, underlining the need for an alternative strategy in the battle against wealth inequality.
Enter the estate tax. Once robust, the Tax Cuts and Jobs Act of 2017 significantly reduced the efficacy of the estate tax system. Indeed, in 2020, only around 1,900 estates were sizable enough to be taxable at a federal level, a substantial decrease from the 50,500 taxed in 2001.
The underlying reason for this decline is the gradual elevation of exemption amounts. Experts argue that a reformation approach should focus on reducing such exemptions, thereby increasing tax revenues from larger wealth accumulations.
A concept known as a step-up basis underlies much of the potential changes in estate tax law. Presently, the value of an asset is recalculated at the time of inheritance, often leading to a reduced or eliminated capital gains tax. The removal of this advantage would function similarly to the proposed wealth tax, taxing wealth accumulation through capital assets.
Furthermore, Lily Batchelder, professor and Treasury Assistant Secretary for Tax Policy, proposed an innovative idea back in 2006: a genuine inheritance tax. Taxing inherited wealth at the recipient’s current income tax rate, plus an additional 15%, could create further incentives for wealth distribution.
As a direct alternative, the estate tax holds a more solid legal position than the wealth tax, shining as a beacon of pragmatism amid the turbulent sea of wealth inequality debates. By lowering the exemption threshold and rates to those closer to 2001 levels, implementing progressive rate adjustments, and abandoning the stepped-up basis, the estate tax could tackle wealth accumulation over a longer timeline, thereby achieving a more equitable tax landscape.
Find more on the topic from the words of tax and technology attorney, Andrew Leahey, here.