Article created by The Century Foundation.
When President Bush included the estate tax in his 2001 tax cut proposals, advocates of estate tax abolition convinced many people that this is an unfair tax that deprives even the little guy of the right to pass on his hard won nest egg to his family. This image never came close to reality. The estate tax in 2000 already was aimed at the biggest estates, exempting all but the top two percent from any taxation at all.
Nevertheless, a strangely structured estate tax reduction was enacted, raising the exemption limit and lowering the tax rate steadily until the tax disappeared for one year in 2010, after which the tax was supposed to revert to its 2000 form. This was part of an elaborate smokescreen, built into the 2001 tax law in order to hide its true cost by acting as if the tax cuts would be temporary.
Since the 2001 act was passed, the estate tax has been reduced so that in 2006, a couple’s estate below $4 million is tax exempt. From two percent of all estates, the proportion of estates now subject to the tax has fallen to less than one half of one percent.
This is not enough for the opponents of any taxation of estates. They are preparing to try once again to abolish the tax altogether. (Another option, form Senator Kyl of Arizona, would retain an estate tax with an exemption of $10 million and a rate one third the current level.)
Like an effort by hardened alcoholics and their providers to keep bars open after 3 a.m., the estate tax debate today cannot be spun as anything but a grab for favors by hardcore interest groups. The friends in government of the very wealthiest Americans want to give their patrons another big tax break.
The small business owners and farmers who long have been the poster children of those who want to abolish the estate tax are almost all gone. (The Center for Budget and Policy Priorities reports that fewer than 300 farms and single owner businesses will be subject to the estate tax in 2006.) Those still subject to the estate tax are the wealthiest 12,600 estates, a third of the number that the estate tax law of 2000 would have taxed. Almost 9000 of these estates are valued over $10 million.
Even in 2000, before any estate tax reduction, the effective tax rate, after exemptions are accounted for, came to less than 20% of the value of taxable estates. Legacies to a spouse as well as charitable contributions always have been tax exempt. Yet, even with today’s substantial reductions in coverage of the estate tax, its abolition would cost close to a trillion dollars over 10 years. Even if the 2009 estate tax levels were made permanent, more than half of estate tax revenue would be retained. (The 2009 exemption level is $10 million and the marginal tax rate 45 percent.)
The estate tax takes a small proportion of the inheritance windfalls of the children of the very, very rich to help cover our collective costs. At this time of fiscal disorder, with no end in sight to our wartime expenditures, the last thing we need is to abolish this fair and important tax.