In recent weeks, I’ve suggested several deals moderate Senate Democrats could strike with a Trump White House to forestall the even worse policies that will surely come from the House of Representatives, where Republicans’ Tea Party faction remains in control.
Here’s another: acquiesce to the elimination of the federal estate tax – a longtime GOP goal – but do it in return for the elimination of a loophole that now allows the wealthy to avoid paying capital gains taxes.
One of the biggest loopholes in federal tax code allows people to hold on to their stocks, bonds, real estates and artwork until they die, and then pay no taxes on the appreciation of those assets above the price originally paid for them – what’s known as the capital gains tax, which currently is set at 20 percent. For most of the wealthiest Americans, most of what they inherit is capital gains.
To give you a rough idea of how big a loophole this is, consider the federal government takes in only about $20 billion from the estate tax yearly. Although the rate is higher – 40 percent – the tax raises so little because the first $11 million is exempt from taxation for married couples. As a result, of the 2.6 million Americans who die each year, only the wealthiest 5,000 or so actually have to pay the dreaded “death tax.”
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In comparison, the “death loophole” to the capital gains tax costs the Treasury about $50 billion yearly. That means even if you exempt the first million or two in “unrealized” capital gains, taxing capital gains at death would make it possible to eliminate the estate tax while still raising the same amount of annual revenue, or more.
The politics of this deal is particularly attractive. Donald Trump could declare a great bipartisan victory. And Democrats who broker the deal will be forever immunized from Republican charges they hate the rich and begrudge their success.
The only people unhappy with this deal would be the liquor distributors, oil drillers, hedge fund managers and other scions of family fortunes who have spent hundreds of millions of dollars in campaign contributions to buy GOP support for an end to taxes on inherited wealth.
During the campaign Trump’s proposal to eliminate the estate tax included a little noticed provision to exempt only the first $10 million from capital gains taxes – anything over would be subject to the tax. But he also included a provision that the tax would not have to be paid until the inherited assets were sold by the heirs. Democrats could demand Trump dump the unlimited deferral as the price of their support.
For Democrats, this is a win-win strategy.
If Trump accepts it, he can claim a great political victory while Democrats can take satisfaction in having preserved a tax on inherited wealth and preserved $20 billion to finance vital government operations. The proposal also will boost economic growth over the long run by freeing billions of dollars in capital now locked in to existing investments to avoid capital gains taxes.
If Trump refuses the deal or can’t bring along the GOP Congress, Democrats will have a simple, clear message about “crony capitalism” and “tax loopholes for billionaires” to use to confront every Republican at every town hall meeting and in every tweet and television commercial between now and 2018. If Democrats can’t turn that to their political advantage, they don’t deserve to win elections.
The art of dealing with Trump is to offer him a deal his ego can’t refuse. It’s not a whole lot more complicated than that.
Steven Pearlstein is a Washington Post business and economics writer and a Public Affairs professor at George Mason University.