Monday, April 13, 2009

Inheritance Tax

The sunset provision was a way for the Bush administration to hide the long-term effects of their budgets on future deficits and national debt.

The estate tax is levied when wealth is transferred at death. When people die, their assets are
typically distributed to relatives, other designated individuals, or charities. If people have
substantial wealth in their estate, an estate tax is paid before their wealth is passed on. This means that it is not a person who pays estate tax, but the executors on behalf of an estate. The tax is levied when an estate is settled, not at the time of death, as some opponents of the tax claim.
A surviving spouse can receive the entire estate of his or her deceased spouse, regardless of its size, without paying any estate tax. Similarly, funds donated to charity are 100 percent
deductible and reduce the size of the estate, thereby reducing or eliminating the estate tax owed.
Only households with multiple millions or billions in net worth pay an estate tax. In 2006,
individuals receive a $2 million exemption from the estate tax and couples receive a $4 million
exemption. As a result, it is estimated that less than one-third of one percent (0.27 percent) of all estates will pay the federal estate tax in 2006, about one out of every 370 estates. Based on census projections for 2006, 2.3 million people will die in 2006 and only about 6,300 will have taxable estates.
In other words, 99.7 percent of all people who die in the U.S. this year will be able to pass on 100 percent of their assets free of any estate tax.

In May 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA), which included provisions to phase out and temporarily repeal the estate tax. This
law incrementally raised the amount of wealth exempted by the tax from $675,000 in 2001 to
$3.5 million in 2009. In 2010, the estate tax will be repealed for one year. But in 2011, the entire tax law will sunset and the estate tax will revert to the pre-2001 law, but with a $1 million wealth exemption. The reason for this odd sunset provision of the law is that the long-term expense of abolishing the estate tax would be extremely high, estimated at about $1 trillion for the decade beginning in 2012. In 2001, estate tax repeal advocates were unable to marshal the 60 votes needed to suspend Senate “pay as you go” rules. These Senate rules required that a tax cut be offset with budget cuts and/or revenue increases. Congressional tax-cutters needed to mask the long-term costs of their tax cuts, and they expected to build additional political support to return in later years to make the tax cuts “permanent.” However, their efforts in 2002, 2003, and 2005 have so far failed to secure the needed Senate votes to permanently repeal the estate tax.
The estate tax foes, meanwhile, have infused the debate with a steady stream of myths and
misleading statements. Among their biggest whoppers is that the estate tax costs nearly as much
– or as much – to collect as it brings into the treasury. In fact, the annual revenue from the estate
tax is more than double the entire budget of the IRS.
Another ready talking point has been the argument that the levy represents a double tax. This one
is particularly ironic in the case of the wealthy families because most of their assets have yet to be taxed a first time, let alone a second. A study commissioned by the pro-repeal AFBI assumed that 70 percent of wealthy families’ assets were in the form of untaxed, unrealized capital gains. For many families, the AFBI’s researchers said, the figure was as high as 90 percent.
Note that capital gains are not taxed until the gain is realized.

A final argument against the estate tax – castigated as the “death tax” by its critics – is that it represents an unjust levy against hard work and thrift. But most of the members of the superwealthy families profiled in this report are unqualified to make such claims themselves. In only a handful of the families profiled in this report is the individual who actually earned the fortune still alive. Thus, most of the members of these families can attribute their wealth to inheritance, not to their own hard work.

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