The Federal Estate Tax Survives a Near-Death Experience

It looks like the estate tax will survive its near-death experience.

For months, the tax has been public enemy No. 1 for fiscal conservatives, who have given it the ominous-sounding nickname of "the death tax." Under the Bush-era tax cuts, the levy was suspended for 2010, yielding a bonanza for families of the super-wealthy who went to the great country club in the sky this year, such as New York Yankees owner George Steinbrenner. His heirs saved a reported $500 million on their tax bill.

The tax, however, was set to return next year at a rate of as much as 55% on estates valued at more than $1 million, which would also have affected many middle-class taxpayers, whose assets could have easily hit that level when property and investments were considered. But the deal announced Monday by President Barack Obama and congressional leaders preserves the levy for two years at a more reasonable 35% rate, with an exemption of up to $5 million for individuals and $10 million for couples.

Some critics of the tax, though, still aren't happy. "For all of this year, there has not been a punitive and immoral tax imposed on people simply because they die," writes Daniel J. Mitchell of the libertarian Cato Institute, in a post on the think tank's blog. He argued that he was pleased that the tax wasn't worse, but he still believes ". . . there is no justification for this class-warfare levy."

"A Backstop" for the Government

For now, investors are happy that the larger tax fight on Capitol Hill seems to be over and sent stocks soaring in early trading Tuesday. The agreement also extends the Bush tax cuts for two years and will provide unemployed people an extra 13 months of benefits.

Wealthy people, many of whom get large portions of their income tax-free, will do fine. "Since the wealthy can control the time of sales of their assets, they generally time them for low rate or for ability to use loses to offset gains, further ensuring that they minimize the taxes paid," writes Wayne State University law professor Linda Beal on her blog. "Accordingly, the estate tax serves as a backstop to ensure that they contribute something to the government that has facilitated their wealth."

Among the many critics of the estate tax, some argue that it unfairly penalizes small businesses and farmers, along with people who prudently invest their money. Before its repeal, the U.S. estate tax was the third-highest in the world, according to the American Family Business Institute, which supports repeal. Other critics claim that a permanent repeal would create more than a million new jobs.

"Americans spend about as much hiding from the death tax as it generates ($28.8 billion in 2008, according to the latest revenue data)," writes Deroy Murdock, a fellow at the Hoover Institution on War, Revolution and Peace at Stanford University in the conservative National Review Online. "Americans understand the death tax's intolerable cruelty. They believe that people of all income levels should be free to bury their loved ones in peace without enduring family quarrels and worse, refereed by CPAs and financial advisers. Bereavement is excruciating enough without having to inspect spreadsheets and tax schedules."

A Victory for Buffett


Unfortunately, Uncle Sam could not afford to be more generous. According to the Center on Budget and Policy Priorities (CBPP), permanently repealing the estate tax would would increase the deficit by $698 billion over the next ten years compared to letting the tax return in its pre-2001 form. CBPP says that the $1.3 trillion figure cited in this story previously was outdated.

Some billionaires, including Warren Buffett, have spoken out in favor of the tax, which was established to help fund World War I. In fact, the legendary investor said repealing the levy would be a "terrible mistake." For now, the Oracle of Omaha has won the day.

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Diane

Cut the spending now. Don't double and triple tax every penny. This is not right. Its the government confiscating your property. Lets get rid of government and cut their budgets by 20% across the board.

December 12 2010 at 1:06 AM Report abuse rate up rate down Reply
mkmcm

I despise this tax. Work all your life, pay taxes when you earn it. Simply die, and then the government gets anothe whack at it? This is simply a bad idea and unfair.

December 11 2010 at 7:41 PM Report abuse -1 rate up rate down Reply
Mark--- Aileen

Warren Buffett is for the tax because (I think) he sells Life Insurance. Most people that are going to be taxed on their seem to buy life insurance to pay for the taxes that their heirs are going to have to pay & as I understand it is done in a manor thatit is not part of "The Estate". now doesn't that make alot of sense, or dollars & cents.

December 08 2010 at 6:35 PM Report abuse +2 rate up rate down Reply
1 reply to Mark--- Aileen's comment
chessgms2

Ummm......Warren Buffett doesn't sell life insurance. He is the head of one of the largest investment funds on earth, Berkshire Hathaway, and for years has been the wealthiest person in America. (Because of the way the Bush tax code changed the way money is taxed.....income based on actual Work is taxed at a much higher overall rate than income based on Wealth....Buffett recently remarked that HIS tax rate, as the richest guy in America, was only about 16% while his Receptionist was taxed at about 31%......and how that was simply WRONG.
Here's the thing about the estate tax. First off, something like 85% of all Americans will NEVER RECEIVE AN INHERITANCE OR LEAVE AN ESTATE VALUED OVER $50,000, with most of those people pretty much instead receiving zip, nada, nothing. (Inheriting fifty grand even BEFORE Bush was tax-free). Your notion that people buy life insurance to pay estate taxes is mistaken. Again, there are NO estate taxes unless your estate is valued in the millions, so burying poor ole Dad either wouldn't be a problem even if Dad left you a measley $750,000. Ten grand for a decent funeral, and you've got $740,000 left over. Tax-free, end of story. Most guys worth over 3.5 million don't worry much about having to remember to pay Met Life's premium every three months like regular folks. They're covered with what they already have. As it stands now, if you die and leave ten million (which nobody HERE will do) the first 3.5 million of that is taxp-free. The other 6.5 will get dinged at 35%, leaving you with $4,200,000 of THAT left after the new tax rate......a grand total of $7,500,000.00 for your heirs. I think they'll make out OK without a hundred thousand life insurance policy, tax or no tax.
Buying life insurance is for the vast majority of people who will NOT be leaving or inheriting millions of dollars, and have NO wealth or much of anything else to pass on to their surviving family members if they die......leaving them with half a mortgage left to be paid, credit card bills, car loans, no college money for the kids saved up, what have you, and now no income from the Deceased to pay it with. The life insurance settlement would be to make sure your wife and kids dont lose the house, the car, can afford to even bury you.......and to make up for lost income you wont be alive to earn to support them now that you're dead and will in all probability STAY that way, and therefore provide for your family in your absence.
It is NOT a means to pay Estate Taxes. Again, unless your estate is worth millions, which I seriously doubt, none of your surviving family will owe a dime in tax to Uncle Sam. Neither will 99% of the rest of the people posting here screaming about Death Taxes either, believe me.

Don't believe everything Fox News, the Republicans, and the Heritage Foundation tell you. They're usually lying, trust me.

December 17 2010 at 8:58 AM Report abuse rate up rate down Reply
hhirock

You can always count on Uncle Sambo to find a way to stick it to people that live within their means and are doing there best to be responsible citizens.

December 08 2010 at 4:12 PM Report abuse +1 rate up rate down Reply
Robert

Whats fair about a lifetime of labor to insure your family is taken care of when your gone and the FEDs take 35-55%. I pay taxes on every penny I earn or spend. Heres a crazy idea cut goverment ibstead of killing the golden goose.

December 08 2010 at 9:25 AM Report abuse +5 rate up rate down Reply
glaimc863

TAX THE WEALTHY, NOT US POOR SLOP'S ON DISABILITY AND RETIRMENT WE'VE PAID FOR YEAR'S & YEAR'S AND STILL HAVE TO PAY AT THE END OF THE YR.,PUT MORE TAXE'S ON LAWYER'S, DR'S. THE PEOPLE FROM INDIA WHO DON'T PAY TAXES AT ALL AND CAN HAVE A BUSINESS TAX FREE, START TAXING THEM,LEAVE UP POOR SLOP'S WHO ARE JUST GETTING BY ALONE, AND YOU OBAMA SO BE TAXED THE HIGHEST OF ALL WITH ALL THE VACATIONS YOUR WIFE TOOK ON OUR TAX $ WITH FRIENDS, AND YOUR MOTHER IN LAW WHO LIVES VERY NICELY IN THE WHITE HOUSE ON OUR TAX $'S.

December 08 2010 at 9:06 AM Report abuse -2 rate up rate down Reply
Junior

warren buffet or anyone else that opposes doing away with the estate tax ,should just voluntarily give money to the goverment if they feel that way

December 08 2010 at 7:30 AM Report abuse +6 rate up rate down Reply
MY LORD

The Death tax should be repealed, period.

December 08 2010 at 7:23 AM Report abuse +8 rate up rate down Reply
Ron Gurney

If we can prevent the government's wasting of the labors of the people under the pretext of taking care of them, the people will be happy. (Thomas Jefferson)

December 08 2010 at 2:00 AM Report abuse +7 rate up rate down Reply
APerfectGentlman

Horrendous copy-editing mistake in the second-to-last paragraph.

December 08 2010 at 1:56 AM Report abuse +1 rate up rate down Reply