But What About the Trust Fund Babies?

by Dollars and Sense

The Senate passed (51-48) a non-binding resolution to lower the estate tax. It's heartening to know that in times of great economic crisis, the US Senate has not forgotten America's future Trust Fund Babies.

From the wires:

By a 51-48 vote, the Senate embraced a nonbinding but symbolically important amendment by Arkansas Democrat Blanche Lincoln and Arizona Republican Jon Kyl to exempt estates up to $10 million from the estate tax. Estates larger than that would be taxed at a 35 percent rate.

Obama is proposing exempting estates up to $7 million and taxing larger ones at a 45 percent rate instead of the $2 million exemption and 55 percent rate slated to take effect in 2011.

The WSJ has, predictably, gone apoplectic:

This controversy dates back to George W. Bush's first tax cut in 2001 that phased down the estate tax from 55% to 45% this year and then to zero next year. Although that 10-year tax law was to expire in 2011, meaning that the death tax rate would go all the way back to 55%, the political expectation was that once the estate tax was gone for even one year, it would never return.

And that is no doubt why the Obama Administration wants to make sure it never hits zero. It doesn't seem to matter that the vast majority of the money in an estate was already taxed when the money was earned. Liberals counter that the estate tax is "fair" because it is only paid by the richest 2% of American families. This ignores that much of the long-term saving and small business investment in America is motivated by the ability to pass on wealth to the next generation.

A few problems with this analysis. The tax affects only 0.2% of all estates, according to the New York Times yesterday:

In addition to creating the false impression that the estate tax eventually hits everyone — by mislabeling it a "death tax" - opponents routinely denounce the 45 percent top tax rate as confiscatory. In fact, the rate applies only to the portion of the estate that exceeds the exemption. As a result, even estates worth more than $20 million end up paying only about 20 percent in taxes.

Another misleading argument is that the estate tax represents double taxation. In truth, much of the wealth that is taxed at death has never been taxed before. That’s because such wealth is often accrued in the form of capital gains on stocks, real estate and other investments. Capital gains are not taxed until an asset is sold. Obviously, if someone dies owning an asset, he or she never sold it and thus never paid tax on the gain.

Chuck Collins has previously demolished the myths surrounding the estate tax for Dollars & Sense:

Death Tax Deception includes a handy sidebar detailing the hidden interests behind the campaign to repeal the tax.

In The Estate Tax: A Recycling Program in Disguise, Chuck describes how voters in Washington State pushed back an attempt to repeal the estate tax there.

For more info, check out the Estate Tax FAQ page from United for a Fair Economy.

Labels: Chuck Collins, estate tax

 

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4/03/2009 10:46:00 AM