Good morning. Today, my colleague Jesse Drucker explains why the estate tax isn't working. We're also covering a manhunt in New York, Pete Hegseth and albums of the year. —David Leonhardt
A broken system
The federal estate tax — which is imposed on a tiny sliver of rich Americans when they die — is being eviscerated. In theory, the tax is simple. A married couple can pass along about $27 million (say in cash or stock) to their heirs tax-free. Anything above that is supposed to be taxed at a rate of 40 percent. But although the wealth of the richest Americans has soared over the past several decades, estate tax receipts have not.
To understand what that means, consider this: Revenue from the estate tax has barely changed since 2000, even as the wealth of the richest Americans has roughly quadrupled. If the tax had simply kept pace, it would have raised around $120 billion last year. Instead, it brought in about a quarter of that. That shortfall would be enough to triple federal research funding for both cancer and Alzheimer's — and still leave enough to double the entire budget of the Justice Department. There are several reasons the tax isn't working. In today's newsletter, I'll explain three important ones. Anti-tax warriorsThe tax has been getting weaker since the 1990s, when a few things happened. For one, a handful of billionaires, including the Kochs, Waltons and Mars families, funded a lobbying campaign to kill the estate tax. It culminated when George W. Bush signed a law that gradually cut the top rate to 45 percent, down from 55 percent, and gradually raised the size of the fortune that could be exempt. The amount excluded doubled in the 2017 Republican tax overhaul signed by Donald Trump. Now, a married couple can pass down $27.2 million to their heirs without paying a dime of estate tax. Many of these provisions end next year, but Republicans seem likely to expand them. The incoming Senate majority leader, John Thune, has sought to abolish the estate tax for nearly three decades in Congress. When he jumped from the House to the Senate in 2004, he unseated the Democrats' leader in part by running against the "death tax." Now, as the top Senate Republican serving alongside a president from the same party, he'll have a chance to further gut it or scrap it altogether. Artful dodgersA second reason is that the tax system operates differently for the wealthiest Americans. Creative lawyers have stitched together obscure regulations, court decisions and narrow rulings to help the rich pass along their fortunes. One mechanism is the intentionally defective grantor trust — or, as estate planners have nicknamed it: "I Dig It." It uses a complicated borrowing strategy to bypass a federal gift tax limit. (The gift tax prevents rich people from giving heirs all their money before they die in order to avoid the estate tax.) By splitting up ownership among family members, wealthy Americans can also claim that assets moved into the trust are worth less than their previous market value. Trump's family did this with his father's portfolio of New York City properties in the 1990s, cutting his gift and estate tax bills. In 2017, Trump's Treasury Department withdrew proposed regulations that would have curtailed these discounts. Defund the policeFinally, the I.R.S. struggles to do its job — and that's by design. Republicans have led a decades-long effort to defund the agency. That has meant fewer audits for the ultrarich. In the 1990s, the agency audited more than 20 percent of estate tax returns. In recent years, it was less than 4 percent. Congressional Republicans cut $20 billion for law enforcement at the I.R.S. in a recent spending bill.
Add it all up, and it means that each year the richest Americans pass down approximately $200 billion without paying a dime of estate tax on it, estimates Daniel Hemel, a tax law professor at New York University. I wrote a story The Times published today about Nvidia's C.E.O., Jensen Huang, who uses several estate-tax-cutting strategies, including an "I Dig It." He also has funded something called a donor-advised fund, which reduces his eventual estate tax bill even if that money never goes to charity. He's on pace to avoid more than $8 billion in estate taxes — or about a quarter of what the United States collects annually from the tax. The magnitude of his tax dodge sets him apart. But the way he got there is becoming typical. Related: Trump picked Billy Long — a former Missouri congressman who cosponsored a bill to end the estate tax — to lead the I.R.S.
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Here is today's Spelling Bee. Yesterday's pangram was embanked. And here are today's Mini Crossword, Wordle, Sudoku, Connections and Strands. Thanks for spending part of your morning with The Times. See you tomorrow. Correction: An item in yesterday's newsletter about Biden's trip to Angola used the word descendants when it should have said ancestors. Sign up here to get this newsletter in your inbox. Reach our team at themorning@nytimes.com.
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