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As we careen over the fiscal cliff, there is plenty of talk about the income tax and capital gains. But there is little interest in the estate tax -- the one that would benefit America if indeed we do fly over the cliff.

As we near jumping off the fiscal cliff,  the ramifications of not doing a deal has indeed focused on both capital gains and the income tax. Lost in this discussion has been the effect on the estate tax, long a darling of conservatives, and assiduously protected.

Well, absent an agreement before Jan. 1, the estate tax, which is 35 percent on estates above $5 million, will revert back to the pre-Bush tax adjustments with a rate of 55 percent on those above $1 million. Using the conservative’s label “death tax” and the seemingly odorous result of increasing the tax while lowering the bar for those who pay it, Republicans raise an alarm worthy of more discussion.

A bit of history on what more accurately can be called a tax on transfer of property after one dies. While the focus is on the estate tax changes in 2012-13, the genesis of this type of tax goes back to ancient Egypt, the Romans, Feudal Europe, and even our country in Colonial times with the Stamp Act of 1797. So it is not a tax that has been summarily or recently imposed on the American people in some sort of capricious manner.

In 1862, the U.S. Congress enacted a "duty or tax" with respect to certain "legacies or distributive shares arising from personal property" passing, either by will or intestacy, from deceased persons. The basis for the current estate tax was enacted in 1916 under the Revenue Act of 1916, which first used the term "estate tax." Under an extension of the 2009 estate tax law (i.e., a $3.5 million exemption, a maximum rate of 45 percent, and a state death tax deduction), 6,500 estates will pay $18.2 billion of estate taxes in 2011.  If, Congress does not act on the estate tax, and we return to $1 million exemption, a maximum rate of 55 percent, and a state death tax credit), 43,500 estates will pay $34.4 billion of estate taxes. A nice sum for our nation’s revenue, but a pittance for most who are paying it.

To begin with, according to a study published by the Federal Reserve Bank of Cleveland, only 1.6% of Americans receive $100,000 or more in inheritance.  Then there are a variety of Trusts, exemptions, spousal considerations, exclusions, and other “tools” to escape paying much…or even anything. In fact it is estimated by the Tax Policy Center, that only about 40 percent of the estates filing estate tax returns owe estate taxes.   Moreover, because of the significant distribution of wealth in our country, those who must pay the tax are generally comfortably able to do so.

In the United States, wealth is highly concentrated in a relatively few hands. As of 2010, the top 1 percent of households (the upper class) owned 35.4 percent of all privately held wealth, and the next 19 percent had 53.5 percent, which means that just 20 percent of the people owned a remarkable 89 percent. In terms of financial wealth (total net worth minus the value of one's home), the top 1 percent of households had an even greater share: 42.1 percent. These are the real targets of estate taxes, and the heirs of this wealth would find very little erosion in their massive inheritance by paying a bit of it back to the country in which that wealth was created.

Given all this, there is a strong rationale to maintaining, and possibly strengthening, the estate tax. It can be argued, it is not “wealth” itself that is being taxed, but merely the transfer of that wealth. So, it really creates no disincentive to accumulating wealth. Further, many large fortunes represent unrealized capital gains which (because of a step up in basis at the time of death) will never be fully taxable true gains under the federal income tax.

Additionally, there is the fact that the super rich are today creating an elite class of concentrated wealth. The estate tax mitigates this to some extent. Winston Churchill noted that estate taxes are “a certain corrective against the development of a race of idle rich”. It is not necessarily that being rich is bad, wrong or evil – but its extreme concentration is undesirable and socially unhealthy. History has shown that in countries where mal-distribution of wealth is highly skewed to a small minority (remembering that 1 percent of us now own 42 percent of the financial wealth), the result can be unstable and unsettling.

So, if we go off the fiscal cliff, and terrible things might happen to the wealthy, this is mitigated by the fact that the estate tax (if changed) affects only a tiny number of Americans; it has a wide range of exclusions and escapes; and those who pay it would find it easily affordable at whatever rate. Letting the estate tax revert to pre-Bush days might well be good for the country.


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Comment Preferences

  •  If deferred cap gains are the reason for the (1+ / 0-)
    Recommended by:

    tax, let's just change the tax laws to fit the policy.  That's what Canada does: any gift or bequest is a disposition that triggers capital gains tax for the donor / decedent.

    •  the tax, with its very high rates (0+ / 0-)

      is meant to be confiscatory.   A tool to stop great wealth inequality which is directly linked to social problems, bad policy in government, etc.    It is not merely to capture capital gains taxes that may have been avoided or deferred during life, but to stop huge concentrations of wealth and the second reason is the more important policy reason.

      •  Sure. $1MM is too low for that policy (1+ / 0-)
        Recommended by:

        purpose, though.  Someone with a nice house and a well-funded IRA that's unlucky enough to die before drawing down on the balance isn't exactly whom the policy is aimed at, although they'll get whacked w/ estate tax under the 2001 / 2013 default tax system.

        •  I agree (1+ / 0-)
          Recommended by:

          one million is too low.   I think it ought to be addressed, I am happy at $3.5 million, especially given that many people with that much wealth can and do pay for estate planning that allows marital deductions, etc., to double the amount.

          But I am also 100% in favor of the tax, high rates and the policy goal of redistributing wealth.

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