Estate Tax Debate
Debates and Polls
For Debates and Polls
On All Topics
Other than tax attorneys, the estate tax has few friends and raises very little revenue at a heavy cost to the economy.
The current estate tax dates back to 1916, a time when many in Congress were looking for ways to redistribute some of the wealth held by a small number of super-rich families. The first permanent estate tax had a top rate of only 10 percent, and the threshold was high enough to ensure that the tax effected only a tiny fraction of the population.
It generates complex tax avoidance schemes.
What tax doesn't?
The hardest hit by the tax are farmers and small business people who work hard to pass on an enterprise of value to their children.
Because the first $600,000 (this is gradually raising to $1 million level in 2006) of an estate is exempt from taxation under current law, and an unlimited amount of property can be transferred to a spouse free of tax, fewer than two percent of all deaths result in estate tax liability. It is estimated that only 1.66 percent of all decedents in 1997 will have estates large enough to require payment of some estate tax
Under current law, family-owned businesses and farms may be valued in a special way that reflects the current use to which the property is put, rather than its market value. To use the special valuation, the decedent or other family members must have participated in the business for a number of years before the decedent's death, and family members must continue to operate the business or farm for the NEXT 10 years. These conditions, along with the $750,000 cap on the value of property subject to the special use valuation, assure that the benefit goes to relatively smaller businesses and farms that are family owned and operated.
Its bias against saving and wealth generation is the antithesis of the American dream and discourages savings.
In 1941 the Estate Tax reached an all time high of 77 percent.
Today, the tax is 37% on amounts above the 1998 exemption level of $625,000 and goes up to 55% on estates of $3 million or more.
One of the tenets of a fair tax system is that income is taxed only once. Income should be taxed when it is first earned or realized, it should not be repeatedly re-taxed by government. The estate tax violates this tenet.
In the U.S. tax system, capital gains income, the income from the appreciation of assets such as stocks, bonds, OR real estate, is not taxed until the income is "realized," that is, until the assets are sold. If an asset is held until the owner dies, the gain in the value of the asset is never subject to capital gains tax or any other tax. The bulk of the largest wealth accumulations have never been touched by the income tax--they're mainly unrealized capital gains. Without the estate tax, those gains would remain untaxed forever, because the income tax forgives those deferred taxes at death.
The cost of the estate tax reduction would have to be paid for either raising somebody's taxes or a reduction in programs that benefit low- and middle-income households.
Here is an example, one that can be reiterated throughout the world: Brazil allows the transfer of large fortunes (especially land) from one generation to another. Subsequent generations do not farm--or in any other way make productive--the extensive holdings. They simply hold on to it as an investment. I have been told that one family can often own unproductive land the size of Nebraska! Despite its size (Brazil is larger than the continental U.S.), would-be farmers interested in putting the land into production cannot acquire the land at reasonable prices (because there is no competition). The country suffers because a potential increase in production is denied and because some of its families must seek their livelihoods in the overcrowded industrial sector. The purpose of eliminating the estate tax is to allow the accumulation of increasing wealth in the hands of fewer people. The consequence is an unceasing decrease in productivity and jobs.
"The parent who leaves his son enormous wealth," wrote steel magnate Andrew Carnegie a century ago, "generally deadens the talents and energies of the son, and leads him to lead a less useful and less worthy life than he otherwise would." You'd think that Republicans, if anyone, would sympathize with Carnegie's point. After all, if giving a single mother $10,000 a year in welfare stifles her incentive to work, just think how much worse it must be for someone who gets a windfall of 100 or 1,000 times that much.