America’s federal government has levied an inheritance tax against the value of a dead person’s estate since 1916. The recently passed tax reform bill established that the first $11.2 million of a person’s estate is completely exempt from this tax. A married couple that plans ahead can effectively double this amount to $22.4 million. Anything above that is taxed at rates of up to 40%.

“Step up basis” is a provision intended to protect heirs from double taxation. It establishes that bequest recipients have the value of their gifts “stepped up” to the good’s value at the time of the donor’s death. If this were not done, the government would effectively get two bites at the tax apple: first a share of the value of the good at a person’s death, and then again on any gains the recipient would get when they sell the good. Step up basis is fair in the context of an inheritance tax as it means the government taxes profits once and only once.

Many Republicans, however, want to repeal the inheritance tax and keep step up basis. Indeed, the bill passed by the Republican-controlled House last fall included this provision. Nor is this the first time the House has tried to do this: it passed a bill eliminating the inheritance tax while keeping step up basis on a nearly party line vote in April, 2015.

If this combination were to ever become law, America’s wealthiest individuals would effectively pay no tax on the billions of dollars they had saved over the course of their lifetimes. Their estates would not be taxed because of the inheritance tax’s elimination, and their heirs would pay no tax on the accumulated gains on the investments or property they received. Hundreds of billions of dollars would go untaxed, giving billionaires a massive tax break.

The amounts at stake are simply mind-boggling. According to Forbes’ daily updates of the net worth of the planet’s richest people, the ten wealthiest Americans have estates of approximately $692 billion.[1.  See ‘The World’s Billionaires: today’s winners and losers’, Forbes, accessed 3 February, 2018.] Assuming, for the sake of argument, that only about half of that amount represents unrealised gains on their investments, that means nearly $350 billion would never be taxed at all under the House GOP approach.[2.  The Federal Reserve estimates that 55 %  of the value of estates in excess of $100 million consists of unrealized capital gains. See ‘Why the death tax may not matter any more’, Bloomberg, 31 October, 2017.]At the current effective capital gains tax rate of 23.8%, that means the federal government would lose nearly $74 billion in tax revenue.[3.  Following the passage of the 2017 tax bill, the highest tax rate on long-term capital gains is 20 %. An additional 3.8 % is imposed for people earning over $200,000 under what is called the “net investment tax”. See ‘The tax bill is finalized‘, Forbes, 16 December, 2017.]

Left-wing groups and activists predictably decry this as a giveaway to the rich. Right-wing groups and activists, however, don’t even note this possibility exists. During my research, I was unable to find a single mention of an anti-tax or right-wing group analysing or justifying this policy. There are plenty of justifications for the elimination of the inheritance tax, or the ‘death tax’, but not a single one explaining why coupling this with stepped-up basis retention is fair.

Perhaps that’s because it is an article of faith among many Republicans that the capital gains tax rate should be zero to begin with. The Tax Foundation, for example, is a very influential group on the American right and it endorses this idea.[4.  See ‘Standard economics says capital in come taxes should be zero‘, Tax Foundation, 14 April 2013] Grover Norquist’s Americans for Tax Reform, the single most important group favouring tax reform, has long called for a zero % capital gains rate.[5.  See Supercommittees should not hike capital gains rate, Americans for Tax Reform, 24 October 2011. ATR once sponsored a zero % capital gains rate caucus among Congresspersons and Senators. See ‘Zero capital gains tax caucus adds eight new members’, Americans for Tax Reform, 7 March 2002. See also Interview with Grover Norquist, American Bar Association Quarterly, Spring 2011 (ATR founder and President Grover Norquist says “you get rid of capital gains tax, good.”).]

If you don’t think that capital gains should be taxed, then the enactment of such a policy by stealth for the uber-wealthy won’t trouble you one bit.

The attitude behind the tax proposals, however, continues to dominate economic thinking on the American right. As such, it drives a further wedge between the Right and the increasing number of Americans who believe they do not benefit from the modern global economy. It’s one thing to stop death from being a taxable event; Americans think that’s only fair. It’s quite another to make death a “get out of tax free” card for the Davos set. A party that continues to listen to this siren song should not be surprised when one day they look up to find the Left firmly ensconced in power.

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Audiocast: Charlotte Pickles presents her wealth tax manifesto

By Sally Chatterton

Most of us work for a living. We aren’t trustafarians, with a nice monthly dividend check from a safely-invested inheritance we didn’t earn. Nor are we corporate titans, with millions in stock options salted away after a stellar business career. Those kinds of people are pretty rare.

So how can it be fair to tax income from work at a higher rate than income from wealth? At the moment, we tax workers at 20%, 40% or 45%, but dividends at 7.5%, 32.5% and 38.1% and capital gains at 10% and 20% (18% and 28% on property excluding first homes).

The only people who benefit from these lower rates are the ones who are already rich. A tiny minority of wealthy people who don’t have to work for a living are getting a much better deal than everybody else who does. So, too, are those on the highest incomes: people earning over £1 million receive a fifth of their incomes in dividends, interest and property income, relative to less than 5% for those earning between £20,000 and £30,000. The ‘haves’ are being subsidised by the ‘have-nots’. No wonder so many people feel the system is unfairly stacked against them.

That’s why we support a simple proposal: tax all income the same, whether it comes from work or from wealth. Equalising the rates would make our tax system dramatically simpler and fairer at a stroke, because self-employed people and corporate bosses wouldn’t be able to avoid higher income tax rates by getting paid in capital gains or dividends instead.

It’s not a new idea; our tax system used to tax all income equally from 1988 to 1998, when Nigel Lawson was Chancellor. It wasn’t just a question of fairness; it made our economy work better too. Lawson argued that taxing different types of income at different rates was nothing more than political favouritism; a taxpayer-funded subsidy for whichever side has the best Westminster lobbyists. Equal treatment allows investment and jobs to flow to wherever they can be deployed most productively, without distortions, making British firms more competitive and efficient on the international stage.

And, in a fast-changing world, investing to win in new industries will be essential. The fourth industrial revolution means British businesses will probably be unrecognisable in 20 years from now. People will be doing jobs we’ve never heard of, and existing roles, in everything from law to medicine or teaching, will be done by fewer staff with help from super-smart robotics.

That’s a godsend for countries with ageing workforces, such as Britain, because it means our economies can become ever-more-productive and efficient with fewer workers. But it also means we mustn’t become too dependent on taxing income from work instead of wealth. The system should be future-proof, which treating income from work and wealth the same would make it.

And, socially, we need to make sure it isn’t just the top 10% of share owners or those trustafarians who benefit from all those investments in the new economy. A universal, pooled investment fund – a UK Sovereign Wealth Fund – would mean everybody would get some income from wealth as well as work. It would knit Britain’s divided society back together by creating concrete proof that the system isn’t stacked against the ‘have nots’. And it would be the perfect complement to our new, simpler, fairer and more economically-efficient tax system.