The Estate Tax Rises from the Dead

The tax cut extension deal includes a proposal to reinstate the estate tax with a $5 million exemption. But forcing only a few families to bear the tax seems troubling.

Among the tax proposals being advanced as a compromise by the President and Republican leadership yesterday was a proposal to reinstitute the estate tax with a $5 million exemption. The compromise plan would set the estate tax at a top rate of 35 percent, which would apply after the $5 million exemption. This estate tax proposal would allow a married couple with $10 million in assets to pay no Federal estate taxes with minimal tax planning. Currently of course, there already is no estate tax.

While there are no firm numbers available, my extremely rough guess is that the current law would result in less than a couple hundred thousand decedents with estate tax liabilities in 2011. The compromise would cut that number to well under 10,000 estates being hit with an estate tax in 2011.

If the compromise becomes effective on January 1st, the family of a truly wealthy individual would save $350,000 on every $1 million in his estate if that wealthy individual met his fate the day before the Rose Bowl game. Think about decisions being made with respect to whether to keep grandpa on life support. Some might actually be willing to make the ultimate sacrifice to save their families what could literally be hundreds of millions of dollars, or in a couple of cases, billions of dollars in estate taxes.

The basic argument against the estate tax is "I made it, I paid tax on it and I should be able to do anything I want with it." The basic arguments in favor of the estate tax include making sure that an aristocracy does not develop through successive generations paying no tax.

An interesting question, rarely discussed, is whether it is appropriate and reasonable to have a tax which impacts only a few thousand individuals every year. There is something a little unseemly in that possibility.  As we isolate our tax system like a laser on the wealthy and expect them to carry more and more of the taxes necessary to operate this democracy and while we exempt more and more of us regular guys from paying taxes, there is something unsettling in the result.

Maybe the right answer is that if we are going to have an estate tax, why not a very low rate, maybe 5% for anyone over a very low threshold growing to 35% over $5 million. Otherwise, let's just scrap the darn thing.