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Obama Would Freeze 'Death Tax' at 2009 Levels
Posted Thursday, December 11, 2008 ; 06:00 AM | View Comments | Post Comment
It's a tax that few individuals or businesses pay, but one that generates much heated debate in Washington, D.C.
By Walt Williams
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It's a tax that few individuals or businesses pay, but one that generates much heated debate in Washington, D.C.
The estate tax -- also known as the "death tax" -- is the federal tax on the transfer of property after a person dies. It currently is scheduled to phase out by 2010, although it would return in 2011 if Congress takes no action.
Many business advocates and conservatives would like to see it go away altogether. However, President-elect Barack Obama has proposed freezing the tax at 2009 levels, mainly to help pay for tax cuts for lower- and middle-income individuals.
His proposal has critics on both sides of the political spectrum.
"If you think about the families who have these enormous fortunes ... I think the government provides a lot of things to make those fortunes possible," said Steve Wamhoff of Citizens for Tax Justice, a nonprofit organization that promotes what it calls fair tax policies for low- and middle-income families.
The federal estate tax has been phasing out since 2001 because of tax cuts pushed through Congress by President Bush. The year before he took office, individuals had to pay a maximum 55 percent tax rate on the value of their estates above $675,000.
Bush's tax cut gradually increased the exemption while lowering the maximum tax rate. The exemption jumped to $1 million and then to $2 million. At the same time, the tax rate dropped below 50 percent.
The exemption will have grown to $3.5 million per spouse while the tax rate will have shrunk to 45 percent by 2009. Obama has proposed locking in the tax at this level, which he has said would exclude a vast majority of businesses and individuals.
The exemption is considerable. A 2005 report by the Congressional Budget Office concluded that only 9,200 of the more than 108,000 estates that filed an estate tax return in 2000 would have needed to do so had the $3.5 million exemption then in place. Only about half that number actually would have had to pay the tax while fewer than 200 estates wouldn't have had the assets to pay what they owed.
Some 250 estates in West Virginia owed the tax in 2000, according to an analysis by Citizens for Tax Justice. That figure had shrunk to 76 estates by 2007, accounting for less than 0.4 percent of all deaths in the state that year.
Wamhoff said the figures show that the estate tax only falls on the "very, very, very wealthy."
The image touted by estate tax opponents of families losing their farms is simply not true, he said. While it is understandable that people want to leave their families better off, there is nothing in the estate tax that prevents it.
"We are not talking about people who are not going to be able to make the next generation as comfortable as they were," he said.
Citizens for Tax Justice believes Obama should scale back the size of the tax cut, although it doesn't suggest a particular amount.
At the same time, Pete Sepp of the National Taxpayers Union said that eliminating the tax makes more sense than even keeping just a small part of it.
"The tax not only hurts business development, it also can hurt other kinds of federal revenue flows," he said.
While Sepp acknowledged that relatively few people pay the tax, he said the bigger impact was the ripple effect caused as individuals and businesses look for ways to avoid it. Businesses will engage in unproductive strategies to stay below the threshold and keep operating, which could have an effect on payroll taxes and employment-related taxes.
As far as the rich paying their fair share, Sepp argued they already do. The top 1 percent of taxpayers earn 21 percent of the nation's adjusted gross income and pay 36 percent of federal income taxes, he said.
"If that isn't giving back, I don't know what is," he said.