Framing the estate tax
How the Right loves to lie about taxes
September 23, 2005
The Right must have run out of good reasons for the estate tax’s repeal this week, because they have gone back to the same boring tall-tale about the death of family farms. I suppose they don’t care about the social programs that will be scaled back when state and federal governments see a $60 billion/year fall in revenue ….
MYTH: The death tax should be repealed
Of course, the group's name is misleading. There's nothing fair about the estate tax, or as some of us prefer to call it, the death tax. It hits people at the worst possible time….
Many families have been forced to sell their land or shutter the family business just to pay the death tax, which can seize up to half of a dead person's assets. Congress has taken sensible steps to phase out the death tax. It's scheduled to decline every year until 2010, when it will finally disappear. But unless lawmakers make that permanent, the death tax returns in 2011 -- at the high rates of 2002….
The Senate soon may consider a measure that would permanently repeal the death tax. The House has already passed a similar bill. Senators should do the right thing and put both "Americans for a Fair Estate Tax" -- and the death tax itself -- out of business for good….
--Ed Feulner, “Keep the Death Tax Dead,” Washington Times, 9/19/05
REALITY
Taken from our last estate tax debunker
The estate tax absolutely should not be repealed. Period. Originally instituted to raise revenues for the government during times of war, the estate tax was permanently incorporated into US tax code in 1916. The Economic Growth and Tax Reconciliation Act of 2001 is set to repeal the entire estate tax system in 2010 and the Bush administration is very adamant about making this revocation permanent, even though it will cost the government $60 billion a year and create a windfall for the very wealthy. Lost in the debate of whether the United States should have such a tax is conversation and clarification about the true impact the estate tax has on Americans. Let's kick in the facts (Courtesy of the Center on Budget and Policy Priorities):
A key component of President Bush's tax package would repeal the federal estate, gift, and generation-skipping transfer tax by 2009. Repealing the estate tax is costly, reducing revenues for both the federal government and states, and would provide a massive windfall for some of the country's wealthiest families.
In 1997, the estates of fewer than 43,000 people — fewer than 1.9 percent of the 2.3 million people who died that year — had to pay any estate tax. The Joint Committee on Taxation projects that the percentage of people who die whose estates will be subject to estate tax will remain at about two percent for the foreseeable future. In other words, 98 of every 100 people who die face no estate tax whatsoever.
To be subject to tax, the size of an estate must exceed $675,000 in 2001. The estate tax exemption is rising to $1 million by 2006. Note that an estate of any size may be bequeathed to a spouse free of estate tax.
Each member of a married couple is entitled to the basic $675,000 exemption. Thus, a couple can effectively exempt $1.35 million from the estate tax in 2001, rising to $2 million by 2006.
The vast bulk of estate taxes are paid on very large estates. In 1997, some 2,400 estates — the largest five percent of estates that were of sufficient size to be taxable — paid nearly half of all estate taxes. These were estates with assets exceeding $5 million. This means about half of the estate tax was paid by the estates of the wealthiest one of every 1,000 people who died.
If the estate tax had been repealed, each of these 2,400 estates with assets exceeding $5 million would have received a tax-cut windfall in 1997 that averaged about $3.5 million. ...
Moreover, a recent Treasury Department study shows that almost no estate tax is paid by middle-income people. Most of the estate taxes are paid on the estates of people who, in addition to having very substantial wealth, still had high incomes around the time they died. The study found that 91 percent of all estate taxes are paid by the estates of people whose annual incomes exceeded $190,000 around the time of their death. Less than one percent of estate taxes are paid by the lowest-income 80 percent of the population, those with incomes below $100,000.
Small Businesses and Family Farms
Very few people leave a taxable estate that includes a family business or farm. Only six of every 10,000 people who die leave a taxable estate in which a family business or farm forms the majority of the estate.
Nevertheless, it often is claimed that repeal of the estate tax is necessary to save family businesses and farms — that is, to assure they do not have to be liquidated to pay estate taxes. In reality, only a small fraction of the estate tax is paid on small family businesses and farms. Current estate tax law already includes sizable special tax breaks for family businesses and farms.
To the extent that problems may remain in the taxation of small family-owned businesses and farms under the estate tax, those problems could be specifically identified and addressed at a modest cost to Treasury. Wholesale repeal of the estate tax is not needed for this purpose.
Farms and family-owned business assets account for less than four percent of all assets in taxable estates valued at less than $5 million. Only a small fraction of the estate tax is paid on the value of farms and small family businesses.
Family-owned businesses and farms are eligible for special treatment under current law, including a higher exemption. The total exemption for most estates that include a family-owned business is $1.3 million in 2001, rather than $675,000. A couple can exempt up to $2.6 million of an estate that includes a family-owned business or farm.
Still another feature of current law allows deferral of estate tax payments for up to 14 years when the value of a family-owned business or farm accounts for at least 35 percent of an estate, with interest charged at rates substantially below market rates.
Claims that family-owned businesses have to be liquidated to pay estate taxes imply that most of the value of the estate is tied up in the businesses. But businesses or farms constitute the majority of the assets in very few estates that include family-owned businesses or farms. A Treasury Department analysis of data for 1998 shows that in only 776 of the 47,482 estates that were taxable that year — or just 1.6 percent of taxable estates — did family-owned businesses assets (such as closely held stock, non-corporate businesses, or partnerships) equal at least half of the gross estate. In only 642 estates — 1.4 percent of the taxable estates — did farm assets, or farm assets and farm real estate, equal at least half of the gross estate.
Furthermore, the law can easily be changed to exempt from the estate tax a substantially larger amount of assets, including those related to family-owned farms or businesses, and this can be done without repealing or making other sweeping changes in the estate tax. When the Senate considered the estate tax last year, the Democrats offered a substitute that would have raised the exemption for a family-owned business to $8 million for a couple, effectively exempting almost all family-owned farms and three-quarters of family-owned businesses from the estate tax.
In reality, the estate tax is an attempt by the government to tax the appreciation of an asset. Most estates are comprised of assets that were purchased with previously-taxed income, but in the years following the purchase have increased in value. If any of these assets are sold prior to someone’s death, they would be subject to capital gains tax, so why should this appreciation go untaxed in the event of a person’s death? This is especially important when you consider that when assets are passed down, the assets’ costs are reset from their original purchase prices to their value at the time of inheritance. If death taxes are abolished, any asset appreciation from the time of purchase till the time of inheritance would go untaxed, even in the event that the heir sells the assets after inheriting them.
instead of eliminating estate taxes altogether, the smarter move for the US may be to institute a different form of such taxes, such as an inheritance tax. The main difference between an estate tax and an inheritance tax is the party that gets taxed. In the case of an estate tax, the tax is paid by the estate before any assets transfer to the heirs. The inheritance tax, however, is paid by an heir once they inherit their portion of the estate. The inheritance tax could be implemented in a variety of forms, all allowing special provisions for farms, businesses, spouses, and charitable donations.
Regardless of the ultimate path the American estate tax takes, the answer is not to abolish it altogether, as this would only benefit the ultra-rich and, in fact, would take money away from other government programs. Instead the US should take steps to dispel fallacies about the current system and engage the public and elected officials in a discussion about how to make the system better, whether through the restructuring of the estate tax or the creation of an inheritance tax.
