The Estate Tax Kerfuffle

The estate tax cut bill signed by President George W. Bush in 2009 is about to expire and a melee has started on all sides about what, if anything should be done about it. I don’t want to get into the politics of the matter, but some objective discovery may make sorting out print articles and TV talking head rants a bit easier.

First of all, to set the context, the total tax revenue resulting from the estates of the 3 million Americans who die every year is less than 1% of the annual US budget, or about $12 billion. There is currently a $5.4 million exclusion per person, $10.8 million per couple. Depending upon circumstances, any tax due can be paid in up to 14 years. Still with me?

Of the 3 million potential taxable estates, only about 3,600 in 2012 ended up paying any tax at all; that’s less than 0.1%. And 97% of this tax was paid by the top 5%.

If no new legislation is passed, the tax will revert to $50 billion recovered per year over the next 10 years, still a relative drop in the Federal bucket. But, it is estimated that if the current tax cuts are perpetuated, the wealthiest 300 estates will average a savings of some $20 million each.

The arguments about abolishing the tax completely center on the potential liquidation of small businesses and small farms to pay the estate tax, with a corresponding loss of jobs. The claim is that it is unjust to these people to tax accumulated assets that have already been taxed once and denying beneficiaries the benefit of the hard work of a lifetime.

Except that the American Farm Bureau has been unable to find even one family farm that had to be sold off to pay estate taxes. In 2012, there were only 3,600 taxable estates in all, with only about 300—10%—coming from small businesses or farms. And of those, 65 were farms with only 13 being illiquid enough to require the sale of some assets, not all.

The counter argument for allowing estate taxes to rise back to their previous level, or for increasing them past that, is that the estate tax is a partial way to recoup just some of the taxes lost through loopholes. And, in fact, the overwhelming majority of those large estates are comprised largely of capital gains which have never been taxed at all.

Neither side has raised the critical point that so much of the nation’s wealthiest folk already have most of their assets protected for their beneficiaries through generation skipping trusts and foundations, just to name a small part of a long list of strategies to avoid or defer taxation. Even the maximum suggested tax would put only a minority dent in these large accumulations of wealth.

Congresspeople on the right want to abolish the tax altogether and those on the left want the tax raised even further. President Obama has offered to split the difference by letting the tax rise up to just 50% of what the tax was in 2008.

To go back to the question of context, keep in mind that our tax code was last modified in 1986 and since then has ballooned up thousands more pages of loopholes and special interest exclusions. But the lack of moral and political courage in Washington and our state legislatures to tackle the badly needed overhaul of the entire tax code, in lieu of side-shows like the estate tax, defies description.

I would get into what we should be doing about all of this, but that would be political.