If we want to reduce the deficit, without taking a cleaver to needed domestic programs, this may prove the better path...
As we begin sequester, the potential for new revenue has focused on capital gains and the income tax, which conservatives refuse to even discuss. Lost in this dialogue has been a discussion of the estate tax, also long a darling of conservatives, and assiduously protected. However, revisiting it may prove more palatable as a solution to our revenue needs.
In the pre-Bush days, the estate tax was set at a 55% rate for estates over $1 million. With the passage of the American Taxpayer Relief Act of 2012 (ATRA), starting Jan. 1, 2013, Congress set the effective limit at $5 million, indexed that value for inflation, and allowed surviving spouses to claim any exemption not used by their deceased mates. It also raised the rate to 40 percent, 5 percentage points higher than in 2012. However a reversion to the pre-Bush tax, we could raise almost $35 Billion – by itself approaching half of the $85 Billion sequester reductions. This could mean selective cuts of only $50 Billion and no increase in other taxes.
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." With 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 paid $18.2 billion of estate taxes. The estate tax had a hiatus in 2010. In 2012 the rate dropped to 35%.
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. With the current law only about 3300 estates will pay a total of $10 Billion in 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 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 (often called “the Paris Hilton tax”) 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 enhance 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. But the revenue would help America solve its debt difficulties enormously.
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 can be undesirable and socially unhealthy.
So, as we argue about reducing the deficit, the estate tax is forgotten as a desirable way of raising revenue. It 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 it revert to pre-Bush days might well be good for the country.