Estate tax remains unresolved

It has come to this: Congress, quite by accident, is incentivizing death.

When the Senate allowed the estate tax to lapse at the end of last year, it encouraged wealthy people near death's door to stay alive until Jan. 1 so they could spare their heirs a 45% tax hit.

Now the situation has reversed: If Congress doesn't change the law soon—and many experts think it won't—the estate tax will come roaring back in 2011.

Not only will the top rate jump to 55%, but the exemption will shrink from $3.5 million per individual in 2009 to just $1 million in 2011, potentially affecting eight times as many taxpayers.

The math is ugly: On a $5 million estate, the tax consequence of dying a minute after midnight on Jan. 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million.

Of course, there is a "death incentive" whenever Congress raises the estate tax. But it hasn't happened in decades; the top rate has held steady or fallen since 1942, according to tax historian Joseph Thorndike of Tax Analysts, a nonprofit group. In fact, the jump from zero to 55% would be "the largest increase in a major tax that we've ever seen," Mr. Thorndike says.

Too Rich to Live? The estate tax is set to come roaring back in January. That sets the stage for a perverse calculus: End it all—or leave a massive bill for your heirs to deal with. WSJ.com, July 10, 2010

Obama Moves to Raise Estate Tax

President Barack Obama has announced his intention to increase the estate tax:

President-elect Barack Obama and congressional leaders plan to move soon to block the estate tax from disappearing in 2010, suggesting the levy might outlive the "Death Tax Repeal" movement that has tried mightily to kill it.

The Democratic stance on the estate tax contrasts with Mr. Obama's reluctance to press forward with his campaign pledge to raise income-tax rates on top earners, which he worries could have an adverse economic impact during a recession.

But Democrats are determined to act quickly to prevent the estate tax's scheduled repeal. Elimination of the levy on big inheritances was approved by Congress under President George W. Bush in 2001, with rollbacks phased in slowly and its full elimination slated to take effect next year.

The Senate Finance Committee will move within weeks on legislation to reverse that law, and Mr. Obama is expected to detail his estate-tax preservation proposal in his budget next month, congressional tax writers said.

Under the Obama plan detailed during the campaign, the estate tax would be locked in permanently at the rate and exemption levels that took effect this year. That would exempt estates of $3.5 million -- $7 million for couples -- from any taxation. The value of estates above that would be taxed at 45%. If the tax were returned to Clinton-era levels, it would exclude $1 million from taxation with the rest taxed at 55%....

Obama Plans to Keep Estate Tax, Wall Street Journal Online, January 12, 2009

See also:

Barack Obama, Democrat for President, On Estate Taxes

John McCain, Republican for President, on the Estate Tax

Although U.S. Senator (Republican - Arizona) John McCain's has been criticized by conservatives in his party for his inconsistent support of President Bush's tax cuts, his recent no-new-taxes pledge and his prior Senate votes on the estate tax seem to indicate that as president he would be likely to preserve the status quo on the estate tax: in 2007, McCain voted to increase the estate tax exemption to $5 million and to reduce the maximum estate tax rate to 35%; and in 2006, McCain voted to permanently repeal the death tax and to make the Bush estate (and income) tax cuts permanent.

Source: OnTheIssues.Org: John McCain on Tax Reform

The conservative Club for Growth, which favor repeal of the estate tax, rated McCain's voting record 76 out of 100 for 2006 for pro-growth economic policies.

See also:

Barack Obama, Democrat for President, on the Estate Tax
Hillary Clinton, Democrat for President, on the Estate Tax
John McCain Official Site: McCain Tax Cut Plan

October 2008 update: McCain has clarified that he supports raising the estate tax exemption amount to $10 million for a husband and wife and cutting the tax rate on larger estate to 15 percent. He also supports lowering the federal corpoarte tax rate from 35 to 25 percent.

Barack Obama, Democrat for President, on the Estate Tax

U.S. Senator (Democrat - Illinois) and presidential candidate Barack Obama's view on the estate tax:

We have to stop pretending that all cuts are equivalent or that all tax increases are the same. Ending corporate subsidies is one thing; reducing health-care benefits to poor children is something else. At a time when ordinary families are feeling hit from all sides, the impulse to keep their taxes as low as possible is honorable. What is less honorable is the willingness of the rich to ride this anti-tax sentiment for their own purposes.

Nowhere has this confusion been more evident than in the debate surrounding the proposed repeal of the estate tax. As currently structured, a husband and wife can pass on $4 million without paying any estate tax. In 2009, this figure goes up to $7 million. The tax thus affects only the wealthiest one-third of 1% in 2009. Repealing the estate tax would cost $1 trillion, and it would be hard to find a tax cut that was less responsive to the needs of ordinary Americans or the long-term interests of the country.

From Obama's book, The Audacity of Hope, 2006, pp. 191-2.

In the Senate, Barack Obama has consistently voted against repealing or reducing most taxes, including the estate tax, and in favor of increasing most taxes, including the estate tax. Senator Obama, for example, voted no on increasing the estate tax exemption to $5 million and reducing the maximum estate tax rate to 35%, voted no on extending the sunset of the Bush estate tax and GST tax exemption increases (which lower the number of families affected by the estate tax), and voted no on permanently repealing what those who oppose it usually refer to as the death tax.

Source: OnTheIssues.Org: Barack Obama on Tax Reform

The conservative Club for Growth, which favors repeal of the estate tax, rated Obama's voting record 7 out of 100 for 2006 for pro-growth economic policies, and most liberal Senator overall for 2007 by the National Journal.

See also:

John McCain, Republican for President, on the Estate Tax
Hillary Clinton, Democrat for President, on the Estate Tax
Barack Obama Offical Site: Fiscal Issues

October 2008 update: Obama opposes repeal of the estate tax and supports repeal of, or allowing the expiration of in 2010, the Bush (estate and income) tax cuts. He supports one-time or short-term tax rebates for most individual taxpayers (and many filers who don't earn enough to pay federal income tax and pay only payroll taxes) and overall higher estate, payroll, income, and corporate taxes over the longer term.

In response to a question about raising taxes, Obama said that he intends to "spread the wealth around."

January 2009 post-election update: President-Elect Obama's Big Tax Plan by Bill Bischoff, SmartMoney's "Tax Guy":

$300 billion in tax cuts are probably on the way -- and soon.

Right after the election, I was virtually certain that upper-income individuals would face higher federal income tax bills as early as this year. And I didn’t see anything very good on the business tax horizon, either. But after two more months of horrifying economic data, it’s a whole new ball game.

Now, President-elect Obama is proposing a $775 billion economic stimulus package that does not appear to impose higher taxes on anybody or anything for 2009. Instead, it looks like we will immediately see some of the "middle-class tax cuts" Obama promised, plus some unanticipated business breaks too. All in all, these tax cuts could add up to $300 billion (or more) over the next two years....

February 2009 post-election update: Obama's Budget: Almost $1 Trillion in New Taxes Over Next 10 yrs, Starting 2011:

President Obama's budget proposes $989 billion in new taxes over the course of the next 10 years, starting fiscal year 2011, most of which are tax increases on individuals.

ABC News, February 26, 2009.

Billionaries fight estate tax repeal

Billionaire Warren Buffet, one of the world's richest men who, critics note, will personally avoid the payment of most or all death taxes on his estate by giving most of it away to charity, went to Congress today to encourage Democrats to retain the estate tax, against the wishes of the Bush Administration and small business groups:

Billionaire investor Warren Buffett urged senators Wednesday to reject calls by the Bush administration and business groups to permanently repeal the estate tax.

"A progressive and meaningful estate tax is needed to curb the movement of a democracy toward plutocracy," Buffett, the chairman of Berkshire Hathaway told the Senate Finance Committee.

Buffett has long opposed efforts to repeal the tax.

Under the tax-cut package signed by President Bush in 2001, the exemption on the estate tax increases each year, culminating in full repeal in 2010. But the legislation expires at the end of 2010, and estate tax levels return to their pre-2001 levels -- a top tax rate of 55% on inheritances of more than $1 million -- in 2011.

Senate Finance Committee Chairman Max Baucus, D-Mont., said he supports full repeal, but that such a measure doesn't have adequate support. Baucus, noting that less than 1% of families are now subject to the tax, urged lawmakers and others to craft measures designed to exempt most family-owned farms and small businesses.
Sen. Charles Grassley of Iowa, the committee's senior Republican, repeated a call for full repeal.

Grassley said the prospect of family members being forced to sell a business to meet a tax bill shows that the estate tax is fatally flawed from a technical standpoint.
"Instead of the free market determining when assets are bought or sold, the death tax makes that determination," Grassley said....

Buffett urges Senate to oppose estate-tax repeal, CBS Marketwatch, November 14, 2007

See also: Senate Plan to Repeal Inheritance Tax Fails, Washington Post, June 9, 2006

Hillary Clinton, Democrat for President, on the Estate Tax

In the first in a series, California Business Law Blog examines the Republican and Democrat presidential candidates' stance on the estate tax, sometimes also know as the death tax or ibheritance tax. First up, Senator Hillary Clinton (Democrat - New York):

Her current presidential platform proposal, which is to some extent inconsistent with her prior voting record, as can be seen below, is to freeze the federal estate tax at 2009 levels, that is, a $3.5 million exemption (she describes this as a $7 million exemption, presumably meaning, for a married couple, the combined total of $7 million in exemptions, which requires proper estate planning to take advantage of). As a result of the "Bush tax cut", the estate tax has been trending downward each year and is currently slated to be completely elminated in 2010 (unlimited exemption amount, 0% tax rate, leading to numerous estate planning jokes centering around solving estate tax problems by planning to die in 2010). However, due to a legislative compromise and other technicalities, it is also scheduled to jump back to tge old, higher tax levels commencing 2011 (only $1 million exemption, 55% tax rate on the balance). It is unlikely give the current political climate that the currently-scheduled death tax rates for 2011 will be allowed to stand unchanged.

For reference purposes, as this is written, in 2007, the exemption amount is $2 million, and the estate tax rate is 45%.

Recently, on the campaign trail in Derry, New Hampshire, Clinton --

answered questions from voters at a town hall at the opera house here, which was her second stop on a two-day swing through the state.

The first question from the audience after Clinton's speech came from a woman who challenged her plan to pay for universal retirement accounts by freezing the estate tax at 2009 levels. The woman said the money from inheritance had already been taxed when it was earned and she felt taxing it again was the wrong way to fund Clinton's plan.

"People disagree about this, but the estate tax, which came into being by Republicans like Teddy Roosevelt and others, and has been part of our tax system for a very long time is there for a real simple reason: In America, we've never liked the idea of massive inherited wealth," Clinton replied. "Part of the reason why America has always remained a meritocracy where you have to work for what you get, where you have to get out there, make your case to people, come up with a good idea, is that we never had a class of people sitting on generation after generation after generation of huge inherited wealth."

Clinton said people like Bill Gates and Warren Buffet were against doing away with the estate tax, because they made it on their own. She went on to explain, to applause, that a married couple could have an estate worth up to $7 million before getting taxed, and said she considered that a "pretty healthy estate to leave to your children."

Source: MSNBC.com: Clinton Questioned on Estate Tax, October 10, 2007

Critics of Clinton's, Gates', and Buffet's argument - not present to state their arguments in New Hampshire - point out that these men are so wealthy that they do not represent the typical high net worth family that is often attempting to pass a family business or farm along to the next generation, and are millionaries, not billionaires. Gates and Buffet deal in publicly traded companies, and cannot pass along Microsoft or Berkshire Hathaway, each worth billions beyond the personal wealth of either businessman and each owned by thousands of investors, to their children.

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As a Senator, she has had the opportunity to vote on the issue serveral times:

Voted NO on raising estate tax exemption to $5 million.

An amendment to raise the death tax exemption to $5 million; reducing the maximum death tax rate to 35%; and to promote economic growth by extending the lower tax rates on dividends and capital gains.

(Proponents recommend voting YES because:

It is disappointing to many family businesses and farm owners to set the death tax rate at what I believe is a confiscatory 45% and set the exemption at only $3.5 million, which most of us believe is too low. This leaves more than 22,000 families subject to the estate tax each year.

Opponents recommend voting NO because:

You can extend all the tax breaks that have been described in this amendment if you pay for them. The problem with the amendment is that over $70 billion is not paid for. It goes on the deficit, which will drive the budget right out of balance. We will be going right back into the deficit ditch. Let us resist this amendment. People could support it if it was paid for, but it is not. However well intended the amendment is, it spends $72.5 billion with no offset. This amendment blows the budget. This amendment takes us from a balance in 2012 right back into deficit. My colleagues can extend those tax cuts if they pay for them, if they offset them. This amendment does not pay for them; it does not offset them; it takes us back into deficit. It ought to be defeated.

Reference: Kyl Amendment; Bill S.Amdt.507 on S.Con.Res.21 ; vote number 2007-083 on Mar 21, 2007);

Voted NO on supporting permanence of estate tax cuts.

Increases the estate tax exclusion to $5,000,000, effective 2015, and repeals the sunset provision for the estate and generation-skipping taxes. Lowers the estate tax rate to equal the current long-term capital gains tax rate (i.e., 15% through 2010) for taxable estates up to $25 million. Repeals after 2009 the estate tax deduction paid to states.

(Proponents recommend voting YES because:

The permanent solution to the death tax challenge that we have today is a compromise. It is a compromise that prevents the death rate from escalating to 55% and the exclusion dropping to $1 million in 2011. It also includes a minimum wage increase, 40% over the next 3 years. Voting YES is a vote for that permanent death tax relief. Voting YES is for that extension of tax relief. Voting YES is for that 40% minimum wage increase. This gives us the opportunity to address an issue that will affect the typical American family, farmers, & small business owners.

Opponents recommend voting NO because:

Family businesses and family farms should not be broken up to pay taxes. With the booming economy of the 1990s, many more Americans joined the ranks of those who could face estate taxes. Raising the exemption level and lowering the rate in past legislation made sense. Under current law, in my State of Delaware, fewer than 50 families will face any estate tax in 2009. I oppose this legislation's complete repeal of the estate tax because it will cost us $750 billion. Given the world we live in today, with clear domestic needs unmet, full repeal is a luxury that we cannot afford.

To add insult to this injury, the first pay raise for minimum wage workers in 10 years is now hostage to this estate tax cut. We are told that to get those folks on minimum wage a raise, we have to go into debt, so that the sons and daughters of the 7,000 most fortunate families among us will be spared the estate tax. We must say no to this transparent gimmick.

Reference: Estate Tax and Extension of Tax Relief Act; Bill H.R. 5970 ; vote number 2006-229 on Aug 3, 2006);

Voted NO on permanently repealing the "death tax".

A cloture motion ends debate and forces a vote on the issue. In this case, voting YES implies support for permanently repealing the death tax. Voting against cloture would allow further amendments. A cloture motion requires a 3/5th majority to pass. This cloture motion failed, and there was therefore no vote on repealing the death tax.

(Proponents of the motion say:
We already pay enough taxes over our lifetimes We are taxed from that first cup of coffee in the morning to the time we flip off the lights at bedtime. If you are an enterprising entrepreneur who has worked hard to grow a family business or to keep and maintain that family farm, your spouse and children can expect to hear the knock of the tax man right after the Grim Reaper.
In the past, when Congress enacted a death tax, it was at an extraordinary time of war, and the purpose was to raise temporary funds. But after the war was over the death tax was repealed. But that changed in the last century. The death tax was imposed and has never been lifted.
The death tax tells people it is better to consume today than to invest for the future. That doesn't make sense.

Opponents of the motion say:

Small businesses and farms rarely--if ever--are forced to sell off assets or close up shop to pay the tax. Under the current exemption, roughly 99% of estates owe nothing in estate taxes. By 2011, with a $3.5 million exemption, only two of every 100,000 people who die that year would be subject to the estate tax.
Today's vote is on a motion to proceed to a bill to repeal the estate tax. Not to proceed to a compromise or any other deal--but to full repeal. I oppose full repeal of the estate tax. Our Nation can no longer afford this tax break for the very well off. Permanently repealing the estate tax would add about $1 trillion to our national debt from 2011 to 2021.

Reference: Death Tax Repeal Permanency Act; Bill HR 8 ; vote number 2006-164 on Jun 8, 2006).

Source: On the Issues: Hillary Clinton on Tax Reform

The conservative Club for Growth, which favor repeal of the estate tax, rated Clinton's voting record 8 out of 100 for 2006 for pro-growth economic policies.

See also:

John McCain, Republican for President, on the Estate Tax
Barack Obama, Democrat for President, on the Estate Tax
Hillary Clinton Offical Site: Economic Blueprint

June 2008 update: Hillary Clinton ended her 2008 bid for the White House on June 7, 2008, leaving Barack Obama as the presumptive Democrat nominee.