2011 ushered in the return of the estate tax—”death tax” to its critics.
Lawmakers extended for another two years the federal tax rates enacted in 2001 and 2003. Those included annual drops in the estate tax until it hit zero in 2010. The tax was supposed to jump back to 55 percent in 2011, but the agreement to extend the 2001 and 2003 tax rates set the estate tax rate at 35 percent, with the first $10 million exempted.
Liberal Democrats strongly opposed the estate tax portion of the tax extensions agreement—they wanted the tax rate to be higher and the amount exempted to be lower—and may yet try to get their wish by introducing a new estate tax bill.
Others, though, oppose the estate tax regardless of the rate or the amount exempted.
‘Counter to Core Values’
“The very principle that a person’s death triggers the government’s sense of entitlement to take more of the peoples’ hard-earned assets is offensive on its face and runs counter to core American values of industry and individual liberty,” said 60 Plus Association Chairman Jim Martin.
“This is especially true since the assets in question have already been taxed at least twice, as principal income and as investment income, and a good deal of the time the government takes four or five tax bites over the life of the assets,” Martin said. “As an economic reality, assets passed down within families are much more productive and useful to society than those same assets in the hands of politicians and bureaucrats.”
Dick Patten, president of the American Family Business Institute, said: “After a lifetime of saving, investing, and building businesses, farms, or other operations, it is wrong for the IRS to confiscate 55 percent, 45 percent, or even 35 percent of what has been left to another generation’s stewardship.”
“A dollar earned in a salary is subject to income and potentially payroll taxes. A dollar that comes from investment profits is subject to capital gains or dividend taxes,” Patten explained. “When these dollars are reinvested in a company or farm and then left to the next generation, they are taxed yet again by the death tax.”
Supporters of estate taxes argue they recover tax revenue that might have been missed during the taxpayer’s life, including capital gains taxes that were not fully collected.
“Over half the value of inherited estates is capital gains income that has never been taxed. Most large estates include assets such as real estate, stocks, or bonds. Any increase in the value of these assets is capital gain income that would only be subject to the income tax if the assets were sold during the owner’s lifetime,” wrote Americans for a Fair Estate Tax (AFET), a group of nonprofit organizations that support estate tax increases, in a letter to Congress.
Debate Over Effects
There is considerable disagreement over the economic effects of the estate tax. Supporters argue the taxes would create new government revenue that could be reinvested to benefit everyone. They also argue the estate tax boosts charitable donations.
“The estate tax raises revenue that our nation needs to invest in the American people,” the AFET letter argued. “Because the government does not tax assets bequeathed to a charity, the estate tax encourages charitable contributions. This is especially important in light of the current economic downturn in which charities are struggling to continue providing vital community services.”
According to a study from the American Family Business Institute, reinstating the estate tax at any level damages small-business hiring.
“At the rate of 55 percent, the estate tax will destroy over 1.3 million small business jobs. At a 45 percent rate, the estate tax will destroy over 1 million jobs. At a 35 percent rate, the estate tax will destroy over 850,000 jobs,” said Patten.
Matt Glans ([email protected]) is a legislative specialist in financial services for The Heartland Institute.