If the Senate approves a bill that passed in the House of Representatives, Congress will congratulate itself on saving America from the dreaded death tax. Characterizing the estate tax as onerous and inherently unfair is disingenuous. It panders to voters. And most importantly, it passes up an opportunity to offset the deficits about which fiscal hawks are rightly concerned.
The most recent version of the perennial dance Congress does with the estate tax had the House preventing the tax from disappearing altogether next year. Fair enough. And also fair is the House’s action preventing the estate tax from returning in 2011 at 55 percent, with the tax kicking in on estates valued at $1 million and more.
But the House version generously exempts individual estates worth up to $3.5 million and up to $7 million for couples.
The rap on the estate tax is that it is the final insult that follows the final injury. It taxes homes, businesses, farms, land and personal property that has been taxed before. Yet it is not a new concept.
According to the IRS, the estate tax dates to 700 B.C. Egypt, and continued in the Roman Empire and feudal Europe. The United States used a form of the estate tax as early as 1794. A federal estate tax was passed in 1862 to help pay for the Civil War, then repealed in 1870. It was revived in 1898 to pay for the Spanish-American War. It was repealed in 1902, but not before raising $14.1 million.
President Theodore Roosevelt advocated both an inheritance tax and the graduated income tax; the former was approved in 1916 to again pay for a war. An exemption was allowed for estates valued up to $50,000, introducing the concept of protecting middle- and lower-income families.
In 1997, during the heady days of a booming economy, Congress and President Bill Clinton enacted what the IRS calls “among the most significant changes” to the estate tax, “effectively raising the filing threshold to $1 million.” In 2001, the Republican Congress and President George W. Bush set into motion the timetable that was approaching expiration next year. The law ratcheted up exempted estate values from $1.5 million in 2005 to $3.5 million this year.
Taxes have become the equivalent of political leprosy. But this comes at a cost. The Center on Budget and Policy Priorities estimates that permanent repeal would cost the federal government $1.3 trillion over 10 years. The Urban Institute-Brookings Tax Policy Center asserts that at the current threshold, “more than 99.7 percent of estates owe no estate tax at all.” Put another way, the estates of between two and three of every 1,000 people who die will pay any estate tax.
Congress and the president must have the political will to tax those who can bear the burden. The estate tax is a likely source. Lowering the exemption threshold is a modest way to reduce the deficit.