How OBBBA reduces taxes that really benefit from the big wealthy.
Like most Americans, I sometimes find myself not impressed by the U.S. Congress. To be fair, they have struggled to balance the interests of a country as big and diverse as the United States, and a large recently passed Beautiful Act (OBBBA) has made me scratch my head more than usual.
As I wrote last month, OBBBA has implemented job requirements that may deprive many Medicaid benefits but are underemployed. This is bad, but if done to reduce federal debt, the cut can be forgiven. After all, despite a slight decline in debt to GDP ratio during the Biden administration, the debt to GDP ratio is close to its highest all-time high. But the CBO estimates that OBBBA will increase debt by more than $3.9 trillion over the next decade. OK, but maybe all of these obviously expensive tax cuts will benefit middle-income households. Such cuts could offset some of the gap between middle class and super-rich over the past 45 years. Except OBBBA is the exact opposite – the biggest gain is at the top of the income distribution.
I think an OBBBA provision illustrates the fundamental issues of this bill and illustrates Republican priorities in Congress. The provision increases the estate tax exemption to $15 million per person and makes this increase permanent (adjusted through inflation). Without OBBBA, the estate tax exemption will drop to $5 million next year with the pre-increased expiration. Under the OBBBA, any amount of the individual staying at $15 million exempted heirs will be taxed at the current 40% tax rate. Therefore, under Obbba’s leadership, the heirs who die from $20 million in taxable inheritance will owe $2 million in taxes, accounting for 10% of the inheritance. With less than $5 million of waivers, they will owe $6 million.
So, what is the problem of increasing inheritance tax exemption? After all, many people think that estate tax is an unfair form of “double taxes.” Under this explanation, when wealth earns its first income, people are forced to pay taxes for their wealth. Others point out that estate taxes harm family businesses and sometimes even need to sell to avoid declaring businesses and triggering taxes.
Both arguments, I think, are weak. The estate tax is paid by the heirs, not the deceased is dead. These heirs are absolutely not taxed because they are not making money in the first place. There may be more advantages when it comes to small businesses. However, a typical small business is hardly enough to be affected by the estate tax, with smaller exemptions even if the exemptions are smaller. In my own calculations, Consumer Financial Surveythe median household net worth of self-employed persons is approximately $460,000. The 88th percentage point must be higher than the 88th percentage point to find a self-employed person with a waiver of more than $5 million. In addition, the couple’s personal exemption will double to $10 million, shifting the figure to the 93rd percentile of affected businesses, with one of the married couples involved. The OBBBA pushes these numbers to the 96th percentile of the individual, while the couple pushes these numbers to the 99th percentile. Most small businesses will not be affected by or without the OBBBA estate tax.
Indeed, the OBBBA is part of a long-term trend that weakens real estate taxes, so even the richest people in the United States will not be affected by taxes. Figure 1 – Based on Wharton’s analysis – indicates this trend, which shows that the share of households paying any estate tax has dropped dramatically in the two decades before the Covid-19-19 pandemic. In the past, those in the top 2% of payment distributions – now keep rising to the highest 0.1%.
As a result, the tax revenue declined from 0.23% of GDP in 2001, to 0.04% of GDP in 2020, a decrease of more than 80%. Indeed, the same thing Wharton analyzed, if the rules for estate tax remain unchanged in 2000-2020, the income from taxes would be about $650 billion higher than their income. Perhaps, if incomes are from those with the highest distribution of income rather than those lost, then Republicans in Congress would not be forced to cause such severe cuts to Medicaid, affecting the lowest Medicaid.
Interestingly, part of the argument for implementing these Medicaid job requirements is to encourage people to improve themselves through guided procedures. I guess the same logic doesn’t apply to very rich kids, most people may already have all the advantages, and under Obbba, there is another advantage – a tax-free legacy.
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