Taxing Inheritance

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I’ve pondered taxes a lot. My instinct is to keep Government from becoming oppressively bureaucratic. That said Bill Clinton cut 400,000 federal workers over eight years without the trauma imposed by Trump. NOTE THE ALL CAPS. HAVING SAID THIS I CHECKED IT OUT AND DISCOVERED A REPORT FROM AN ORGANIZATION CALLED THE NISKENEN GROUP. IT OFFERS NUANCES.

Skimming this report derailed me from the title I started with. Taxing Inheritance. (to pay for government)

I admired a state senator from Duluth Jim Gustafson a moderate Republican. I recalled being very interested when I heard him deride the end of inheritance taxes which Republicans had successfully renamed “Death” taxes to make people who would never have enough money to pay them turn against them. I’d always thought of them as an anti-aristocracy tax so I had no problem with them. I think now they are a better line of attack than taxes on the rich.

So I asked some questions of AI which reported that during the Second World War we had the highest inheritance taxes on the richest Americans ever. At its height it was 7% of their wealth. But when I asked what a 7% rate on these taxes would raise today it was a modest 57 billion dollars above the 3 billion these taxes raised during the war. That didn’t sound right to me because inflation and the concentration of wealth among billionaires seemed so much more vast. I challenged Chat and it acknowledged this admitting there was only 1 billionaire back then.

This lead me to ask ChatGPT the following question:

“Walk me through what policy changes would be required to get back to that 7 percent share.”

I got a fascinating answer:

Great question — this gets to the mechanics, not just the headline rate. I’ll walk through it cleanly, step by step, and flag what really matters versus what people often over-focus on.
I’ll frame this as: What would have to change for estate taxes to return to ~7% of federal revenue, roughly their WWII-era role.
1. The single biggest lever: the exemption threshold
This matters more than the top rate.
Then (WWII era)
Estate tax exemption was very low (roughly equivalent to $60k–$100k today)
A large share of upper-middle and wealthy estates were taxable
Now
Federal estate tax exemption ? $13.6 million per person (? $27M per couple)
Result: fewer than 0.1% of estates pay any estate tax at all
What would need to change
To approach a 7% revenue share:
Lower the exemption dramatically, likely to somewhere in the range of:
$2–5 million per person, or
A graduated exemption where larger estates lose more shielding
This alone would expand the taxable base by an order of magnitude.

2. Restore steep progressivity in estate tax rates
Then
Top marginal estate tax rates:
70–77% on the largest fortunes
Multiple brackets with steep escalation
Now
Flat 40% top rate
Very few brackets
Applies only above the huge exemption
What would need to change
To get near WWII-style revenue:
Reintroduce multiple progressive brackets, e.g.:
40% on $5–10M
55% on $10–50M
65% on $50–500M
70%+ on billion-dollar estates
Important:
The revenue comes almost entirely from the very top, not from taxing “normal” inheritances.

3. Close valuation and avoidance loopholes (quietly enormous)
This is the least visible but most crucial change.
Common current techniques
Grantor Retained Annuity Trusts (GRATs)
Family Limited Partnerships (valuation discounts)
Dynasty trusts (avoiding estate tax for generations)
Asset freezing and stepped-up basis strategies
Then
Many of these tools did not exist or were tightly constrained
What would need to change
Limit or eliminate valuation discounts
Cap or abolish dynasty trusts
Impose minimum effective tax rules on large estates
Tighten IRS authority on asset valuation
Without this step, higher rates alone will not produce WWII-level revenue.

4. End or limit step-up in basis (this is huge)
This is technically not the estate tax — but it’s inseparable in practice.
Current rule
Assets passed at death get a step-up in basis
Unrealized capital gains often never get taxed
Effect
Encourages holding wealth until death
Shrinks the effective estate tax base
Policy change needed
One of the following:
Tax unrealized gains at death above a high threshold
Or carry over the original basis to heirs
Or apply a surtax on large unrealized gains in estates
This alone could raise tens to hundreds of billions, depending on design.

5. Broaden the tax base to inter vivos transfers (gifts)
Then
Gift taxes were tightly integrated with estate taxes
Lifetime transfers were harder to shield
Now
Same high exemption applies to gifts
Aggressive lifetime planning removes assets before death
Needed changes
Lower lifetime gift exemptions in parallel
Treat large lifetime transfers more like inheritances
Enforce cumulative lifetime transfer accounting

6. Administrative capacity (unsexy but real)
WWII-era estate taxation worked because:
IRS audit rates were much higher
Valuation disputes were aggressively pursued
To reach 7% again:
Specialized IRS estate-tax units
Higher audit probability for ultra-large estates
Better asset reporting (especially for private equity, trusts, art)

7. What wouldn’t be required
This is important:
You would not need to:
Tax ordinary inheritances
Tax family homes below high thresholds
Touch most estates at all
A properly designed system could:
Affect only the top 0.5–1% of estates
Still raise hundreds of billions annually
Bottom line (plain English)
To get back to a 7% federal revenue share, the U.S. would need to:
Lower the exemption dramatically
Restore steeply progressive top rates
Shut down elite avoidance strategies
Tax unrealized gains at death or remove step-up
Treat large lifetime gifts like inheritances
Your instinct is right because:
The modern wealth structure is far more top-heavy than in the 1940s — but current policy barely touches it.
If you want, next we can:
Roughly estimate how much each reform contributes
Compare this to wealth taxes vs inheritance taxes
Or look at how other rich countries do this today

THESE ALL CAPS ARE ME THINKING. THE TERM THAT MOST ATTRACTED ME WAS “DYNASTY TRUSTS” WHICH ALLOW VERY RICH FAMILIES TO SHIELD THEIR WEALTH FOR GENERATIONS. I DISLIKE THE IDEA OF STATES COMPETING AGAINST EACH OTHER IN A RACE TO THE BOTTOM SO THAT RICH PEOPLE MOVE TO WHERE THE STATES DO THE LEAST FOR SCHOOLS, SERVICES ETC. HAVING THE NATIONAL GOVERNMENT IMPOSE UNIFORM INHERITANCE TAXES WOULD ELIMINATE THAT UNHEALTHY COMPETITION WHICH ENTICES THE RICH TO LEAVE THE STATES WHERE THEY BUILT THEIR FORTUNES.

I’M FOR DEATH TAXES.

About the author

Harry is a ferociously good natured eccentric in Duluth Minnesota who detests traitors dressed up as Uncle Sam. You can find somewhat better edited writings of his at the Duluth Reader "contributors." page. The URL is:

https://duluthreader.com/contributors/h/84/284-harry-welty