Misperceptions on estate tax detracting from worthwhile revenues for United States

Professor Jay Soled, a tax attorney and Director of the Master of Accounting in Taxation Program at Rutgers Business School weighs in on new estate tax legislation.

Despite the current budgetary upheavals in Washington, the cycle of anti-estate tax legislation has returned once again to public focus.  Rep. Kevin Brady [R-TX-8] recently introduced a bill in the U.S. House of Representatives—H.R. 1259 called the Death Tax Repeal Permanency Act of 2011.  Four other representatives cosponsoring the bill are: Rep. Dan Boren [D-OK-2], Rep. Kristi L. Noem [R-SD], Rep. Devin Nunes [R-CA-21], Rep. Mike Ross [D-AR-4]. 

The proposed motions of H.R. 1259 offer familiar protests: the estate tax rate is punitive and confiscatory, that it represents double taxation, is a deadly blow to small businesses and family farms, and is the cause of their liquidation that it hurts savings, and creates unemployment. 

However, according to Professor Jay Soled, a tax attorney and Director of the Master of Accountancy in Taxation Program at Rutgers Business School, “There’s a swathe of misinformation that touts the estate tax as applying broadly and that’s not true. The tax actually impacts only 0.1 % of the American public but if you asked 100 people, at least 60 of them would say it applies to them.  Much of the wealth that is taxed at death is comprised of appreciated assets, the gains of which have never been subject generally to income tax.”

Professor Soled also argues that, “People often complain that family businesses or family farms have to be sold to meet the estate tax, but in 2001 when Congress held hearings on repealing the tax, they were hard pressed to find any farms or businesses that were forced to liquidate because of it.  The exemption on such assets has always been rather large historically; as a result, most small businesses and family farms have past beneath the radar of the estate tax.” 

“Critics have also argued that the estate tax carries a high compliance tab. There are two ways to look at this, from the taxpayer’s perspective and that of the government.  The estate tax has for the last 10 years raised about $25 billion dollars in annual revenues.

The IRS budget is around $8 billion; of that amount just a very small percentage goes to manage the collection and administration of estate taxes.”

To eliminate the estate tax altogether would expand the inequities wealth gap, increase deficit spending, and create a tax burden that would shift to ordinary taxpayers, not just the wealthy.  A 2006 white paper from the Public Citizen’s Congress Watch & United for a Fair Economy estimated that “Repealing the estate tax between 2012 and 2021 would cost the country almost $1 trillion in revenue, including interest on the debt”.

“The benefits of the estate tax are considerable,” says Professor Soled. “It raises revenues of an estimated $25 billion annually from high-net worth families, and it enhances charitable giving.  It deters deep concentrations and imbalances of wealth and thereby supports a democratic vision of tax collection.” 

President Obama recently signed an estate tax overhaul that increased the tax-free limit on lifetime gifts from $1 million to $5 million ($10 million for married couples). After that ceiling is reached a tax of 35% applies.

“Raising the exclusion amount of the estate tax is a mistake,” says Professor Soled, “the significance of which is profound.  The Congressional Joint Commission on Taxation needs to revisit this topic when they do their computations because what we’re doing fiscally is not sustainable. Something has to give. Rather than eliminating the estate tax perhaps it should be made more robust. Doing so would go a long way to closing the wealth gap and be an example of responsible tax policy.”

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