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.
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The most important reason for estate taxes has never been raising revenue; it has always been preventing the development of the sort of powerful economic dynasties that are antithetical to the maintenance of a democratic republic. This reason was largely forgotten in the Reagan era and needs urgently to be remembered now, as the economic bubble and burst cycles we have experienced since the 80s proves. The same reasoning applies to the critical need to roll back our income tax rate structure to a pre-Reagan structure.
This is an oft-stated myth that is just not true. The vast amount of wealth subject to the estate tax represents the value of appreciated assets where the gain has NEVER been taxed. Think stock in Microsoft, New York City real estate, or any other asset that has gone way up in value but not been sold during a person's lifetime. What principle of justice says that Paris Hilton (or any other lucky heir) should be able to inherit her grand-daddy's stock without paying some tax? Not only did Paris not pay any tax on this property, she didn't do anything to produce the wealth, either. The estate tax can best be thought of as a tax on club kids.
The tax should not be about estates, but on income to hiers. Switching to a VAT/Business Income Tax/Simplifed high floor income tax provides a rationale for taxing inherited income when assets are liquidated at a level that inceases income to over the income tax floor (which could be anywhere from $50,000 individual/$100,000 family to $75,000 individual/$150,000 family.
Bring on the class war then. 99.7% versus 0.3% sounds like a fair fight to me. To the winners go the spoils!
I really feel sorry for all the poor millionaires who don't get to keep their fortunes when they die. Boo hoo.
This is a joke. This money was already taxed. More class warfare. It stinks.
>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.
This part seems to have been copied from an income tax article. I don't see how annual income relates to estate tax. Besides that, this portion fails to qualify itself as “relative to current law, which includes reversion of tax rates and the AMT exemption to year 2000 levels.” Now to the estate tax issue.
I have long believed that the best available compromise on the estate tax, one that would cut out the huge waste that estate planning represents, is as follows. First, eliminate the estate tax. Second, reduce the benefit of step-up basis at death by requiring beneficiaries to carry a tax basis of half the value of the assets on the date of death unless the beneficiary can prove that the decedent's basis was higher. For most types of investment assets, this should eliminate any need to search records more than a decade or so old. Personal use assets of the type that wear out could be excluded from this provision and carried at market value on the date of death up to $100k or so total.
With this compromise, the beneficiary is not forced to sell to pay taxes. Family farms and businesses can be passed on forever, and the tax will only become due when the property is sold to new owners. The tax rate will be at most half the capital gains rate, but there will be no tax exemption or at least one much smaller than today's $3.5 million.