Americans to inherit $764B, mostly tax free

One way the rich get richer is through inheritance, and they're barely paying taxes on it.

Americans are projected to inherit $764 billion this year and will pay an average tax of just 2.1 percent on that income, New York University law professor Lily Batchelder estimates in a paper published Tuesday by the Brookings Institution.

By contrast, the estimated tax on work and savings is 15.8 percent, more than seven times higher. Many higher-income workers pay far more, with the top marginal rate now 37 percent plus payroll taxes.

“If anything, we should be taxing income from inheritances at higher rates than income from work,” Batchelder, a former adviser to President Barack Obama who has advised several Democratic presidential campaigns on tax policy, said in a phone interview.

To make the system fairer, Batchelder proposes scrapping the estate tax and replacing it with an “inheritance tax.” The difference is more than semantic. The Urban-Brookings Tax Policy Center estimates her proposal could raise as much as $1.4 trillion over the next decade.

Under the current system, wealthy Americans and their estates are required to pay 40 percent on bequests and gifts to heirs. They have many ways to avoid the tax, however. For married couples, the first $23.2 million of an estate is tax-exempt, and the rich can funnel far more to heirs tax-free using trusts and other complicated strategies.