Our guest blogger is Seth Hanlon, Director of Fiscal Reform at the Center for American Progress Action Fund.

On January 24, 1963, exactly half a century ago, President John F. Kennedy called on Congress to enact a broad overhaul of the tax code. One of JFK’s boldest proposals was to close a giant tax loophole that allows wealthy people to escape taxes on capital gains — the appreciation in value of stocks, businesses, or other investments — by holding onto assets until death and passing them onto heirs.

Though JFK’s successor, Lyndon Johnson, pushed through much of the Kennedy tax program in 1964, the tax break on inherited capital gains survived. It exists to this day as one of the largest loopholes in the tax code.

The provision is sometimes called the “angel of death loophole” or, in tax-speak, the “stepup in basis at death.” Here is how it works: Let’s say an investor buys stock for $1,000 and over time it shoots up in value to $100,000. If the investor sells that stock, he’ll owe capital gains taxes on the amount it has gone up.

But if the investor holds onto the stock his whole life and bequeaths it to his heirs, the $99,000 of gain is never subject to capital gains tax. The heirs inherit the stock with what’s called a “stepped-up basis,” which means that if they sell the stock at some point, they’ll only owe capital gains tax on any gain above $100,000.

The inherited capital gains loophole has major effects on the budget, on the economy, and on tax fairness. It results in about half of all capital gains going permanently untaxed. It costs the U.S. Treasury an estimated $50 billion per year (perhaps more). It encourages people to hold onto assets even when they would otherwise want to sell them. And since capital gains are highly concentrated at the top end of the income scale, it undermines progressivity.

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As part of the so-called “fiscal cliff,” the estate tax will revert to its Clinton-era level of of 55 percent with a $1 million exemption per person. (The exemption is the amount of an estate that can be passed on tax-free.) Neither Democrats nor Republicans are interested in seeing that occur. Democrats have proposed setting the rate at 45 percent with a $3.5 million exemption, while Republicans want a 35 percent rate and a $5 million exemption, which is the current level.

Former White House economist Jared Bernstein noted that neither of these plans entails applying the estate tax to even the richest 0.5 percent of estates:

My point here is that in neither case, and in no year from 2011 to 2022, does either plan reach even 0.5% (that’s half a percent!) of estates. The D’s plan starts out hitting about 0.25% of estates and climbs to 0.35%; the R plan goes from about 0.15% to about 0.2%.

So, let’s be clear—under either side’s plan, the estate tax ain’t biting hardly anyone. Death may be certain, but taxes—at least this one—is much more discerning.

The Center for American Progress tax plan includes an estate tax of 48 percent with a $2 million exemption. Billionaire investor Warren Buffett, former President Jimmy Carter, and Bill Gates Sr. all recently signed a letter calling for a higher estate tax than that proposed by President Obama and Congressional Democrats.

A mere 7,450 of the wealthiest estates in the country could receive an average tax break of $1.1 million in 2013, while over 13 million low-income families could see their tax burden increase by $1,000 or more, if proposals by the GOP were to go into effect, according to the Center On Budget and Policy Priorities. The legislation, drawn up by Senate Republicans and already passed by House Republicans, would preserve through next year a cut to the estate tax that was enacted in the December 2010 tax deal. Meanwhile, it would allow expansions of the Earned Income Tax Credit and the Child Tax Credit passed in that same deal to expire.

As the CBPP noted today, the asymmetry in who would and would not benefit from these proposals, and by how much, is striking:

Relative to the 2009 estate-tax parameters, the estate-tax break enacted at the end of 2010 benefits only the heirs of estates that have assets in excess of $3.5 million for an individual and $7 million for a couple. 

For the estates that receive it, the estate-tax break enacted in 2010 is worth an average of $1.1 million per estate, relative to the 2009 parameters, according to the Tax Policy Center. […]

For many lower-income working families, the impact of losing the tax-credit improvements would be substantial. For instance, a married couple with three children that has earnings at the estimated poverty line for 2013 ($27,713 for a family of that size) will receive $1,934 less in combined CTC and EITC benefits next year if policymakers let the improvements expire.  Similarly, a single mother with two children working full time at the minimum wage — and earning about $14,000 — will receive a CTC of just $173 in 2013 instead of $1,725.

The cost of continuing the EITC and CTC through 2013 comes out to $3.4 billion and $7.6 billion respectively, for a total of $11 billion. The cost of the estate tax cut for its original two year period was $23 billion, suggesting an extension for another year would roughly equal the cost of extending the tax credits.

In short, the Republicans are proposing to recoup new revenue by raising taxes on 13 million American families, while losing roughly the same amount of revenue in order to give a minute, rarified group of the wealthiest Americans another year of enormous tax cuts.

According to Bloomberg News, Mitt Romney is taking advantage of a tax loophole to pass off a fortune to his children without paying taxes on it. According to administration figures, this loophole costs the government $1 billion over a ten-year budget window:

In January 1999, a trust set up by Mitt Romney for his children and grandchildren reaped a 1,000 percent return on the sale of shares in Internet advertising firm DoubleClick Inc.

If Romney had given the cash directly, he could have owed a gift tax at a rate as high as 55 percent. He avoided gift and estate taxes by using a type of generation-skipping trust known to tax planners by the nickname: “I Dig It.” [...]

While Romney’s tax avoidance is both legal and common among high-net-worth individuals, it has become increasingly awkward for his candidacy since the disclosure of his remarks at a May fundraiser. He said that the nearly one-half of Americans who pay no income taxes are “dependent upon government” and “believe that they are victims.” [...]

The Obama administration estimates that closing the loophole Romney used would bring the federal government almost $1 billion in the coming decade.

One analyst said that $1 billion is a “laughable” under-estimate of the loophole’s effect, as “a single billionaire could pay $500 million more in estate taxes if these trusts are shut down.”

It’s unclear whether Romney would close this particular loophole, since he refuses to divulge details about his tax plan. However, he has been upfront about his desire to eliminate the estate tax, which only affects the richest Americans. That tax cut would save the heirs of the Koch and Adelson fortunes billions of dollars. As ThinkProgress detailed, the lion’s share of tax breaks doled out in the U.S. go to the very rich.

The tax cut extension package that Senate Majority Leader Harry Reid (D-NV) brought up for a vote today did not include an Obama administration proposal to reset the estate tax to the 2009 level. Senate Republicans, along with a handful of Senate Democrats — including Sens. Mark Pryor (D-AR), Mary Landrieu (D-LA), and Kay Hagan (D-NC) — balked at including the measure.

The Obama administration’s estate tax parameters already kept all but the nation’s very wealthiest estates from owing any tax at all. In fact, by refusing the increase, the Senate will spend $119 billion, to preserve tax breaks for just 3,200 estates:

This year, the per-person exemption is $5.12 million and the top rate is 35 percent. Obama agreed to those parameters as part of a December 2010 deal with Senate Republicans that also extended expiring tax cuts and created a payroll tax cut.

Under those numbers, which Republicans want to extend, 3,600 estates would pay taxes, or fewer than 0.2 percent of estates, according the nonpartisan Joint Committee on Taxation.

Obama proposed a $3.5 million per-person exemption and a 45 percent top rate, returning to parameters that were in effect in 2009. That would require 7,200 estates, or about 0.3 percent, to pay taxes.

Even under the Obama administration’s proposal, just 0.3 percent of estates would be subject to the estate tax, all of them with estates larger than $3.5 million. Those estates that do owe tax will receive a $1.1 million tax break if the administration’s proposal is not adopted and the estate tax stays at its current level.

Meanwhile, the tax plan released by Senate Republicans would raise taxes on 20 million working families.

The Senate GOP plan to preserve the Bush tax cuts on incomes above $250,000 already amounts to a budget-busting tax cut for the rich, and in addition to it, Minority Leader Mitch McConnell (R-KY) and Sen. Orrin Hatch (R-UT) also added another tax cut that benefits only the super-wealthy. The Hatch-McConnell plan effectively eliminates the estate tax, costing billions in revenue and giving a huge tax cut to the very wealthiest Americans, as the Center on Budget and Policy Priorities notes:

Specifically, the new Senate Republican proposal, which Senators Mitch McConnell and Orrin Hatch unveiled earlier this month, would:

Cost $119 billion more in forgone revenues over the next ten years than the Obama Administration proposal to reinstate the already generous 2009 estate-tax rules. Analysis by the Urban Institute-Brookings Tax Policy Center shows that all of the $119 billion would flow to the heirs of the estates of the wealthiest three of every 1,000 people who die, since those are the only estates that would owe any estate tax under the 2009 rules.

Give taxable estates an average of more than $1.1 million each in tax reductions, compared to the tax that would be owed under a reinstatement of the 2009 estate-tax rules. The bigger the estate, the more lavish the tax break would be. Estates worth more than $20 million would receive an average tax reduction of $4.2 million in 2013.

As CBPP notes, even President Obama’s estate tax plan is generous, allowing exemptions on millions of dollars of an estate’s value. The GOP’s plan would provide an even larger exemption, and though critics of the tax claim the estate has already been subject to taxation, in most instances it is not because the increase in value of the estate classifies as unrealized capital gains. If the estate was sold, the increase in value would be taxed. When it is inherited, however, those taxes are never levied.

The GOP doesn’t only give huge tax cuts to the very wealthy, though. It also mitigates a small amount of the budgetary damage done by those cuts by ending three tax breaks that benefit the middle class, a decision that will ultimately raise taxes on 20 million working families if the GOP plan went into effect. That isn’t shocking given the bill is co-sponsored by Hatch, one of the leaders of the Republican Party’s movement to raise taxes on the poorest Americans.

Income inequality in the U.S. is currently the highest its been since the 1920s, with the 400 richest Americans (who are all billionaires) having as much wealth as the bottom 50 percent of Americans combined. And as it turns out, just one wealthy family has managed to amass a fortune equal to that of the combined net worth of the bottom 30 percent of Americans — the Waltons, heirs to the Walmart fortune, as Sylvia Allegretto, a labor economist at the Center on Wage and Employment Dynamics, found:

The triennial Survey of Consumer Finances (SCF) is one of the best sources for data on wealth in the U.S. And, of course the Forbes 400 estimates the worth of the wealthiest amongst us—all 400 wouldn’t be captured in the SCF. If we look at both the SCF and the Forbes 400 we can glean some interesting insights.

In 2007 (the most recent SCF) the cumulative wealth of the Forbes 400 was $1.54 trillion or roughly the same amount of wealth held by the entire bottom fifty percent of American families. This is a stunning statistic to be sure.

Upon closer inspection, the Forbes list reveals that six Waltons—all children (one daughter-in-law) of Sam or James “Bud” Walton the founders of Wal-Mart—were on the list. The combined worth of the Walton six was $69.7 billion in 2007—which equated to the total wealth of the entire bottom thirty percent!

Not only have the Waltons gathered a fortune equal to that of the bottom third of the country, but they spend it lobbying to cut their own taxes. For years, the Waltons have been supporting efforts to cut the estate tax, the tax levied on inheritance. Conservatives intent on cutting this tax — which they’ve brilliantly dubbed the “death tax” — led to President Obama agreeing to a “compromise” last year that lowered the rate and increased the tax-free exemption, giving a senseless tax break to extremely wealthy families.

According to the Congressional Budget Office, “for the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent between 1979 and 2007,” while it grew by just 18 percent for the bottom 20 percent of the income scale. In a given year, the richest ten percent of the country takes home about one quarter of total income. But Congress still saw fit last year to give a tax break to the very richest families, who have collected fortunes that dwarf anything the rest of the country will ever see. (HT: Huffington Post)

Mitt Romney speaking at a Koch summit in previous years; David Koch speaking at his own gala

Tomorrow, 2012 GOP presidential hopeful Mitt Romney is slated to give a “major spending policy speech” at Americans For Prosperity’s Defending the American Dream Summit. Both the conference and AFP itself are funded by money from the billionaire Koch Brothers.

Romney has, of late, been trying to claim the economic plan he put forth is meant to aid the middle-class, not those in the Koch brothers’ tax bracket. “I want to focus on where the people are hurting the most, and that’s the middle class. I’m not worried about rich people. They are doing just fine,” Romney said at a GOP debate last month. Yesterday, he even tried to claim “I’m proposing no tax cuts for the rich.”

Leaving aside that Romney intends to extend the Bush tax cuts for the wealthy, he has proposed a huge giveaway to the very rich by suggesting the complete elimination of the estate tax. Only the very richest households in the country ever have to pay the estate tax, since, right now, an estate must be worth more than $5 million (or $10 million for a couple) to pay any estate tax at all.

Currently, more than half of the estate tax is paid by the richest 0.1 percent of households. And according to a quick back-of-the-envelope calculation, the Koch brothers heirs’ would save a combined $17.4 billion in estate taxes thanks to Romney’s plan.

Each of the Koch brothers — Charles and David — is worth about $25 billion. They are each married, so they would receive an exemption on the first $10 million that they pass down, and then theirs heirs would pay a 35 percent tax, or $8.7 billion, on the rest of their vast fortunes.

Now, this is an exceedingly rough calculation, as it’s almost certain that the Koch’s have engaged in extensive estate planning and would pay nowhere near that amount. But 35 percent is the rate on the books, and Romney’s plan to eliminate the estate tax entirely would undeniably save the Kochs a boatload of money.

David Koch actually hosted one of the first fundraisers of Romney’s current bid for the White House, and according to the Romney campaign, the Kochs are the “financial engines of the Tea Party.” Though Romney claims to be “not worried” about the rich, the actual policies he’s proposed would do a lot to ensure that the Kochs’ never have to pay their fair share.

Several GOP 2012 presidential hopefuls have released tax plans that clearly deliver the lion’s share of their benefits to the very richest Americans. Both former pizza magnate Herman Cain and Texas Gov. Rick Perry, through their embrace of flat income taxes and their elimination of all investment taxes, would deliver huge tax breaks worth millions of dollars to those at the top of the income scale.

Former Massachusetts Gov. Mitt Romney, meanwhile, is trying to claim the mantle of defender of the middle class, saying during a GOP debate that “if I’m going to use precious dollars to reduce taxes, I want to focus on where the people are hurting the most, and that’s the middle class. I’m not worried about rich people. They are doing just fine.” During an interview yesterday with WTVT in Tampa, Romney even claimed “I’m proposing no tax cuts for the rich”:

You’re buying into President Obama’s line and the Democratic Party line that my party is the party of tax cuts for the rich. That just doesn’t happen to be the case. The policies I’ve put forward are tax cuts for the middle-class . I’m proposing no tax cuts for the rich.

Watch it:

Romney’s claim is simply absurd on its face. His tax plan consists of $6.6 trillion in tax cuts, the vast majority of which goes to the wealthy and corporations. In fact, Romney dedicates an entire section of his economic plan to discussing elimination of the estate tax, which only the very richest households in the country ever have to pay (since, right now, an estate must be worth more than $5 million to pay any estate tax at all). Currently, more than half of the estate tax is paid by the richest 0.1 percent of households.

Meanwhile, Romney’s claim that his tax plan cuts taxes for the middle-class has little basis in reality. A ThinkProgress analysis found that the vast majority of middle-class households would get no benefit from Romney’s tax plan, since its based on a capital gains tax cut when most middle-class families have no capital gains.

Romney’s tax plan, while not as generous to the rich as those of his competitors, still delivers its benefits to the top while ignoring those in the middle who haven’t seen their income rise in years. He might try to deny it, but the proposals that he’s put on paper make it very clear where his priorities lie.