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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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Congress will have to take action on estate tax

THE FATE of the federal estate tax is unclear, but one thing seems just about certain–Congress will take some action on the controversial policy next year.

Otherwise, as ghoulish as it sounds, a large number of wealthy elderly people are likely to take their own lives in 2010 to provide for their heirs.

That’s because a 2001 law led to a decade-long phaseout in the estate tax, also referred to as the death or inheritance tax. The tax is scheduled to disappear in 2010 before reappearing the next year on estates worth more than $1 million.

In 2008, estate taxes don’t kick in until a person has a net worth of $2 million. That jumps to $3.5 million in 2009 before being eliminated for exactly one year.

Congress surely realizes the implications of doing away with the tax for one year. Although about 98 percent of Americans aren’t rich enough to be taxed at death, the wealthiest few face the prospect of massive tax savings for their heirs should they die in 2010 rather than 2011.

Therefore expect legislation sometime shortly after this fall’s presidential election. The Wall Street Journal recently ran an article summarizing the two candidates’ stances on this matter:

Sen. Barack Obama proposes a $3.5 million exemption–meaning only those with more than that sum would pay any tax, and those wealthy few wouldn’t pay taxes on the first $3.5 million. He proposes a top tax rate of 45 percent on the remaining part of the estate.

Sen. John McCain proposes raising the exemption to $5 million per person and cutting the top federal estate tax rate to 15 percent.

For the small minority of Americans who face the possibility of estate taxes, either of those proposals is a vast improvement compared with where the tax stood a decade ago, when it exempted the first $650,000 of an individual’s assets. And it speaks to the success of the political campaign waged by those seeking the tax’s repeal.

Anybody interested in learning about how this tax on a select few gained political traction should read an excellent book by Michael Graetz and Ian Shapiro called "Death by a Thousand Cuts."

In addition to being a fantastic primer on the estate tax, the book shows how politics really works. The book, published in 2005, describes how supporters of estate tax repeal:

  • renamed it the "death tax" to give the impression that more than the richest few were affected;
  • made the public face of the movement small farmers and business owners, when in reality most of these folks faced no threat of paying, while the behind-the-scene wealthy elite stood most to gain;
  • took advantage of opponents’ complacency and had the imagination to see the possibility of eventual repeal;
  • organized a vast network of wealthy constituents throughout the country who could lobby individual Congressmen to gain support;
  • gathered the support of gays, lesbians and minorities, convincing them of what they had to lose because of the estate tax;
  • refused to compromise on estate tax reforms, rather insisting on nothing short of repeal;
  • took advantage of the American population’s philosophical opposition to a tax triggered by death, even though most would never be touched.

The coalition of conservative think tanks, farmers, small businessmen, Republican leaders and wealthy elite eventually were able to get the tax reformed in 2001. Graetz and Shapiro paint a picture of an inept defense by estate tax proponents.

But because the 2001 law had a "sunset" provision, the law changes again after 2010. That is if the Congress doesn’t act before then, which is highly unlikely given the ramifications.

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