Ten years ago, Bush and the Republican Congress set out to reduce or eliminate the estate tax which they derided as the “death tax.” However, is it fairer to tax people who are dead and can no longer make use of their wealth, than to increase the national debt which will be the legacy we are leaving our children and their children. Perhaps it would be fair to call the Republican proposal “a birth tax” since future generations will be born saddled with an increasing share of the national debt in order to fund lavish inheritances for multi-millionaire heirs and heiresses like Paris Hilton.
The Republicans wanted to completely eliminate the tax, but they could not resolve the budget implications involved in doing so. Instead, they employed a nice trick. They limited the budget implications by making the changes expire after a decade, but they made the changes incremental building up to this last year in which there was no estate tax whatsoever. By doing so, they hoped to set a favorable baseline for the current debate on future estate tax policy. Indeed, many people would now consider any return to the previous status quo to be a “tax hike”.
Republicans argue that taxing an estate is an example of double taxation. However, this is not true since many estates consist of appreciated assets (stock, businesses, real estate) which have never been taxed, since capital gains are only taxed at the time of sale.
Republicans argue that the income tax is a disincentive to work. However, the same cannot be said of an inheritance tax. If anything, huge tax-free windfalls leave an unskilled heir or heiress without any reason to work. Winston Churchill argued that estate taxes are “a certain corrective against the development of a race of idle rich”. Indeed, according to the research at Syracuse University, the more wealth one inherits, the more likely one is to quit the labor market.
|Year||Plan||Initial rate||Applies only to income above:||Top rate||Applies only to income above:|
|2011||No action by Congress||18%||$675,000||55%||$3,000,000|
|2011||Obama GOP Compromise||35%||$5,000,000||35%||$5,000,000|
|2011||Sanchez, Sanders et al plan||45%||$3,500,000||65%||$500,000,000|
There are a number of estate tax proposals on the table including one hammered out by President Obama and the Congressional Republicans, and recently passed by the Senate. They propose a 35% flat tax on estates beyond the first $3,500,000 (or $7,000,000 for couples). This plan is likely to meet stiff resistance in the House of Representatives.
If nothing is done by the end of the year, we will return to the estate tax rates prior to the passage in 2001 of Bush’s Economic Growth and Tax Relief Reconciliation Act. At that time, the estate tax applied to single people estates over $675,000 (or couples with estates twice as large). The amount over that amount was taxed progressively higher starting at 18% and reaching 55% for the portion of the estate over $3,000,000.
Though the Republicans try to frame the tax debate as a populist issue, only the richest quarter of a percent of our nation’s families would pay any estate tax at all under the plan negotiated between Obama and the Republicans.
Those that do pay would only pay a marginal rate of 35% which is less than the pre-Bush top rate of 55%, and far less than the top marginal rate of 77% which was in effect from 1941-1976.
Even if Congress does nothing and the Bush tax cuts are allowed to expire, only 2% of estates will pay any inheritance tax whatsoever. Furthermore, this tax can be avoided in a number of ways such as leaving the excess estate to some worthy charity.
Last month Responsible Wealth gathered millionaire and multi-millionaire signers of the call who are small business owners and entrepreneurs to speak out on why they support a strong estate tax.
High-profile signers of Responsible Wealth’s “call to preserve the estate tax” include Forbes 400 members David E. Shaw, Julian Robertson, Jr., George Soros, John Sperling, and Ted Turner. All six children of David Rockefeller, the oldest Forbes 400 member, have signed too….
Microbrewery owner Dave Eiffert explained how when his parents died in 1994 and there was a federal estate tax exemption of $600,000 per person, an estate tax was due. “It was pretty hard to write a large check to the IRS, but I strongly thought it was the right thing to do, and look I still had enough money to start a business and provide jobs in my state.” The Snoqualmie Falls Brewery outside of Seattle that Eiffert co-founded in 1997 employs 20.
Another speaker, Jerry Fiddler, a venture capitalist in Oakland, Calif., who sold his software company Wind River Systems to Intel in 2009 and is clearly in estate tax territory, said: “The estate tax is the best possible way to pay back into the common good. I see it as a point of pride to pay back in.” He said that Congress should reinstate the estate tax at the 2009 levels, indexed for inflation, adding: “They should do it now and they should do it permanently.”
To find a lower tax rate imposed on the crème de la crème of society, we would have to look all the way back to the roaring twenties. This was a time when people earned their fortunes the old fashioned way, they inherited it. This was a time of the Great Gatsby and a time of speculation and excesses which led to the Great Depression.
As Justice Louis Brandeis said, “We can have concentrate wealth in the hands of a few, or we can have democracy, but we can’t have both.” Even Andrew Carnegie testified in support of the creation of an estate tax in 1916.
It seems that the Republican Party wants to “Take America Back” to an era of generations of entrenched wealth, creating a “new plutocrarcy to rival the industrial barons of America’s Gilded Age”. Unfortunately, as a misplaced gesture of “bipartisanship” Obama is willing to lead us along that road.
Estate Tax Facts
- A table of historical estate tax rates can be found at http://jewi.sh/etax
- The estate tax has been imposed in the United States since 1916. Small estate taxes were applied in the past: The Stamp Tax of 1797 (repealed 1802), The Revenue Act of 1862 (repealed 1872) and the War Revenue Act of 1892 (repealed 1902). These taxes were small percentage which in the later two cases varied by a factor of around 6 depending on how closely related the heirs were to the deceased. In a similar way, France’s inheritance tax depends on the relationship between the deceased and his heir. Immediately family pays a maximum 40% marginal tax rate, but siblings pay a maximum of 45%, “significant others” pay a maximum of 50%, other close relatives pay a flat rate of 55%, and distant relatives or unrelated heirs pay a flat rate of 60%.
- Federal Estate Tax only applies to the amount over the personal exemption ($1,000,000 in 2009 and $3,500,000 in 2011 under Obama/GOP plan). This liability can sometimes be reduced by:
- $1,000,000 in gifts given to relatives during your lifetime,
- The part of the estate given to your spouse,
- Part of the amount of your family business,
- Designating a charity among the recipients of the estate.
- The amount paid for a state estate tax.
- Generation skipping transfers up to $1,000,000 (2009) or $3,500,000 (2011, Obama/GOP Plan)
- Universal credit $345,800 (2009) or $1,455,800 (2011, Obama/GOP plan)
- $1,000,000 in gifts given to relatives during your lifetime,