Killing the Death Tax

This summer, the Senate fell short of the super-majority needed to bring to a vote a measure permanently repealing the estate tax. This means the current reduced-rate estate tax will revert to the full pre-2001 rates of up to 55 percent by 2011 unless other action is taken. The Senate's lack of action prompted the House to pass the Estate Tax and Extension of Tax Relief Act (H.R. 5970), which would extend estate tax relief beyond 2010, but would not eliminate the tax. This is unfortunate. The evidence shows that the estate tax does little to redistribute wealth and may not provide any net government revenues.

The Estate Tax: Past and Present. The estate tax was first enacted in 1916 on estates larger than $50,000 (equivalent to nearly $1 million today) and the top rate was 10 percent. By the 1930s, the top estate tax rate reached 70 percent on estates larger than $50 million ($666 million in today's dollars), and by 1936, it was a full 11 percent of federal revenue.

In 1997, Congress lowered the maximum rate to 55 percent. In 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) into law. Among its provisions was a gradual phase-out of the estate tax and its full repeal for one year:

** The top marginal estate tax rate will gradually drop to 45 percent in 2009 (down from 55 percent in 2001), while the amount exempted from the tax will increase from $675,000 to $3.5 million.

** In 2006, for example, the top tax rate is 46 percent, and the exemption amount is $2 million.

** In 2010, the estate tax will disappear altogether for one year but, due to the law's sunset clause, returns in 2011 at the pre-2001 rates; estates greater than $1 million will be taxed at a top rate of 55 percent.

The repeal for one year only was due to congressional budget rules. But supporters expected a future Congress to take permanent action. Current opposition to a full and permanent repeal of the tax prompted the House to pass H.R. 5970. The bill would continue to use the traditional stepped-up method for determining capital gains taxes on estate assets, but limit its use in 2010:

** Through 2009, inherited assets sold by the heir would be taxed only on the stepped-up value, which is the difference between the fair market value of the asset at the time the estate is valued, and its appreciated value at the time of sale.

** In 2010, however, estate assets exceeding $1.3 million will be subject to "carry-over" valuation, which is the difference between the appreciated value of the asset and its price when originally purchased by the deceased.

Instead of the total phase-out of the estate tax in 2010, the House bill would institute a permanent lower rate. [See the table.] Between 2010 and 2015:

** The exemption amount would gradually increase to $5 million and would be indexed for inflation thereafter.

** Estates up to $25 million would be taxed at the capital gains tax rate (which is currently 15 percent, but will increase to 20 percent in 2011 unless the lower rate is extended).

** Any amount above $25 million would be subject to an estate tax rate of 40 percent in 2010, with a gradual reduction in the rate to 30 percent by 2015.

The Estate Tax Burden Does Not Fall on the Super-Rich. A common misconception is that the estate tax is paid mainly by the very rich. In fact, for estates beyond a certain size, the burden tends to fall as the size of estates increases. Thus, the estates of those who have accumulated a modest fortune at the end of their careers or in family-owned business may face a higher rate than the estate of a billionaire. Through expensive estate planning, the very wealthy are able to minimize their estate tax burden. Consider:

** The effective estate tax rate on estates of $5 million to $10 million is 16.8 percent.

** However, for estates of $20 million or greater, the tax consumes only 13.5 percent of the estate.

The Estate Tax Does a Poor Job of Redistributing Wealth. Another misconception is that the estate tax is an effective tool for redistributing wealth. Because wealth and income are both highly mobile in the United States, most fortunes are earned rather than inherited and rarely survive past the second generation. Moreover, wealth and poverty are never static; Americans often move up and down the economic ladder depending on their personal circumstances and the state of the economy at a given time. Indeed, Congress' Joint Committee on Taxation (JCT) has resisted inclusion of the estate tax in its tables showing the distribution of the tax burden by income groups, owing to uncertainty about who actually bears the burden of the estate tax.

Furthermore, the impact of the estate tax on saving and capital formation negates much of the redistributive effect of the tax. Economist Joseph Stiglitz notes that to the extent that the estate tax reduces the capital stock, it raises the return to the remaining capital. Hence, it makes the rich even richer.

The Estate Tax Does Not Add Much to Federal Revenues. The estate tax generates little revenue for the federal government. Federal budget data indicates that the estate tax will raise $28 billion this year, accounting for only 1.2 percent of total federal revenues. Furthermore, it is estimated that the estate tax costs the private sector one dollar to comply for every dollar in revenue. This means that the true cost of the estate tax to the economy this year is at least $56 billion.

However, capital gains tax revenue could increase if the estate tax were repealed. That would occur if the current stepped-up basis on assets were replaced by carry-over basis. According to JCT:

** Much of the value in large estates consists of unrealized capital gains, which currently avoid capital gains taxes because asset basis is stepped-up to market value at death.

** That has the effect of reducing federal revenues by more than $50 billion annually.

Under current law, when the estate tax disappears in 2010, any assets that are sold will be taxed on a carry-over basis - in effect, a capital gains tax on their value since they were first acquired by the decedent. This would allow the government to pick up a part of the $50 billion in lost revenue to offset the revenue loss from estate tax repeal. The Senate bill proposed a permanent carry-over basis, but the partial repeal passed by the House retains the stepped-up basis. However, even if stepped-up basis is retained, eliminating the estate tax would increase the capital stock and thus produce higher incomes and more income tax revenues.

It's Time to Bury the Estate Tax. Congress is not considering full repeal at the moment; but lowering the estate tax rate and raising the exemption would be a step in the right direction. However, the estate tax is inefficient, economically harmful, does a poor job of redistributing wealth and doesn't raise much revenue. A better policy would be permanent repeal.

Danielle Georgiou is a policy intern with the National Center for Policy Analysis.

Inheritance is a gift. Why not just tax the heirs for what they receive as regular income and forget about estate taxes altogether?

If I won the state lottery instead of the sperm lottery, that's what would happen.

And please spare me the "family business" arguments. Those have holes big enough to drive a truck through. Go ahead, make my day.

I'll jump right on that family business comment. I have experienced the same thing in business. A partner leaves with the cash, and you are left with the inventory and accounts receivable for which the partner is due a share.

Your business is the physical assets, not the cash. The governments share is the cash, not anything else, and if your business is large enough the family will not be able to come up with sufficient cash to pay the estate tax and keep the business running.

The estate tax destroys farms and small business. Far better to allow business to flourish untaxed by theft of the estate tax, for the taxes that will be paid every year the business is viable, for as long as it is viable. Easier on the business owner, and far more lucrative for the government in the long run.

While I think the ability of the government to tax, post tax dollars, is inexcusable, the estate tax is easily defeated with the use of a trust. A trust is a continuing entity that will never die and be subject to the tax. If someone has $1,000,000 in assets or more, they would be foolish not to plan for their demise in a similar fashion.

Why not just tax the heirs for what they receive as regular income and forget about estate taxes altogether?

These measures will, of course, be different in different countries... 3. Abolition of all rights of inheritance.

Manifesto of the Communist Party by Karl Marx and Frederick Engels

Looks as though you've bought in to that but , thank God, many have not yet!

"These measures will, of course, be different in different countries... 3. Abolition of all rights of inheritance.

Manifesto of the Communist Party by Karl Marx and Frederick Engels

Looks as though you've bought in to that but , thank God, many have not yet!"

So now I'm a communist. Of course, we are talking about TAXING inheritance, not ABOLISHING it.

Last time I looked, the income TAX did not ABOLISH income.

It's just the Mafia, oops, I mean government, gets a cut every time money changes hands. As long as this is reality for all of us, I don't see why someone should get a by.

Do you work for a living? Small biz or large? Do you like your fruit? How about your car? And, how about your washing machine and dryer? SMALL BUSINESSES put blood sweat and tears into bringing you those things....so you think THEY should PAY TAXES AGAIN for that privilege? The truly rich, i.e. Gates, et al....pay big money (cause they have lotsa money) to PROTECT themselves from estate taxes....the rest don't have all that to spend protecting themselves....they're too busy trying to dream up, make, deliver, or fix a product.

Watch the vote November 7th in Washington, the State. There's a vote on the Washington State DEATH TAX. This state is BLUE....see how IT votes.

"I'll jump right on that family business comment. I have experienced the same thing in business. A partner leaves with the cash, and you are left with the inventory and accounts receivable for which the partner is due a share.

Your business is the physical assets, not the cash. The governments share is the cash, not anything else, and if your business is large enough the family will not be able to come up with sufficient cash to pay the estate tax and keep the business running.

The estate tax destroys farms and small business. Far better to allow business to flourish untaxed by theft of the estate tax, for the taxes that will be paid every year the business is viable, for as long as it is viable. Easier on the business owner, and far more lucrative for the government in the long run."

Your example of a partner leaving a business is irrelevant for obvious reasons. This is not what we are talking about.

If an heir chooses to cash out and run from a family business, similar to the partner in your example, the tax issue is peripheral to the central issue.

If all the family heirs choose to remain in the business as partners, then we are dealing with a 16% average hit for additional taxes according to the article, given a worst case scenario. A solid business could absorb a 16% hit through cash reserves or financing.

If not, the solid business could be sold at a discount as an entity, without dissolving. Then the economy as a whole takes no hit. Only the heirs.

"Do you work for a living? Small biz or large? Do you like your fruit? How about your car? And, how about your washing machine and dryer? SMALL BUSINESSES put blood sweat and tears into bringing you those things....so you think THEY should PAY TAXES AGAIN for that privilege? The truly rich, i.e. Gates, et al....pay big money (cause they have lotsa money) to PROTECT themselves from estate taxes....the rest don't have all that to spend protecting themselves....they're too busy trying to dream up, make, deliver, or fix a product."

If you read my post, you might understand I'm not saying anyone should pay taxes twice. Only the heirs once.

Actually, I owned a small business for 10 years. I had to go back to work for someone else because my wife got sick and that was the only way to get health insurance. That put a couple of great employees out of work, so maybe you guys could get upset about that.

And it sucks. So save all that blood, sweat, and tears crapola for your next stump speech. It's good to be king. My boss is not about buying me stuff, nor do I expect him to be. He's about getting my talents at a discount so he can spoil his kids.

Not that my business would have ever come close to reaching the $5 million threshold for the estate tax.

But that's a good thing, in a way. I am able to help my kids get a good start in life, but they won't end up as messed up as my bosses' kids.

You sound bitter...."My boss is not about buying me stuff, ...

Your boss DOES buy you things....he pays you a salary .....that BUYS you things......sorry you have a lousy boss, though.....I agree some people with money don't teach their kids the value of a job or money. But, I don't think all (or even most) of them are that way.

"You sound bitter...."My boss is not about buying me stuff, ...
Your boss DOES buy you things....he pays you a salary .....that BUYS you things......sorry you have a lousy boss, though.....I agree some people with money don't teach their kids the value of a job or money. But, I don't think all (or even most) of them are that way."

I'm not bitter. My boss doesn't buy me anything. He pays me for my contribution to his bottom line LESS than he receives. That's the way it works. I paid my employees less than they made me, or else I wouldn't bother. I look at it as a negotiation that is mutually consensual and beneficial.

I choose what I want to buy with the salary I have earned. Employers aren't running some kind of welfare program. They are looking to make a profit on an employee's labor. If you think employees should be gratefull for that, I'd love some of what you're smoking.

This doesn't make an employer evil, but this ain't socialism.

Somebody had a business. Now someone does not have a business. Someone must work for another who has a business. Conclusion of he who has no business: tax the heirs of the guy who has a business when he dies. Kick him for having a business when you do not.

yitbos

Yes, all assets are the property of the State. You may, at the sufferance of the State, be allowed to keep some assets, should the State grant you the privilege. "From each according to his ability, to each according to his needs" makes for a happy and productive proletariat.

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