The Estate Tax: Hit and Myth
President Obama wants to maintain the 2009 rules on the estate tax—in effect allowing couples with assets of as much as $7 million to pass on their wealth tax free. Amazingly, this has some critics of the levy railing about confiscatory taxes. Art Laffer even argued in this morning’s Wall Street Journal that Obama's estate tax plan would short-circuit an economic recovery.
But wait a minute. Compared to current law, Obama is proposing to cut estate taxes, not raise them. It is true that a bizarre provision of the 2001 revenue law would repeal the estate tax next year. But this tax holiday would last only one year. Starting in 2011, the tax would bite significantly deeper that it does now.
Overall, TPC figures that only about 8,000 bequests would be taxed under Obama's generous estate tax rules. To put it another way, 99.7 percent of those who die in 2011 would be exempt from the tax. Even those making more than $1 million annually would get a tax cut of $8,000 in 2012. Let’s say that again: a tax cut of $8,000. That doesn't slow down the anti-estate tax crowd. They're still spinning this as a tax increase. Orwell would be proud.
Opponents of the estate tax are the best I’ve seen at this. Their economics may be a little shaky, but they are great polemicists. After all, they are the folks who successfully renamed the levy the “death tax” and conjured up images of an IRS agent in a cheap suit waiting to grab your last dollar as you take your last breath. They even successfully created a new image of the American Gothic—a salt of earth family farmer tearfully watching as the heartless IRS man sold his farm at auction to pay the hated tax. To mix historical metaphors, it was all enough to make us wish for a modern Robin Hood who’d save us from the evil Norman taxman. Imagine Grover Norquist as a latter-day Errol Flynn. Or not.
It is all myth, of course. TPC figures 140 family farms and small businesses would owe estate tax under the Obama proposal. You read that right: 140.
That’s not good enough for senators John Kyl (R-Az) and Blanche Lincoln (D-Ark.). They’d increase the exemption to $5 million per individual ($10 million per couple) and lower the rate to 35 percent. It is bad enough that the Obama plan would boost the deficit by roughly $280 billion over 10 years. Kyl and Lincoln would add another $250 billion in red ink. That’s a lot of money for 8,000 uber-rich families at a time when the nation is running massive budget deficits.
This peek-a-boo 2001 tax law has to be fixed. And Laffer and others are right that the estate tax raises a lot less revenue that it might, thanks to myriad planning opportunities. But spinning aside, Obama is already cutting estate taxes for the very wealthiest. All we are arguing about now is how much more of a tax break they should get.