AS THE YEAR-END “fiscal cliff” nears, Republicans and Democrats continue wrangling over taxes and spending. But not all of the conflict is between the parties. Republicans are engaged in a fierce internal battle over how much — or whether — to concede to President Obama on upper-income tax rates. And on the Democratic side, a brush fire has broken out over the estate tax.
Long execrated by Republicans as a “death tax,” the posthumous federal levy on accumulated wealth has Democratic detractors as well, especially those who represent significant numbers of rural landowners. Sens. Mary Landrieu (La.) and Mark Pryor (Ark.) want a one-year extension of the current, relatively light estate tax and have written to the Senate leadership promising to round up 60 votes for their position. This is in contrast to Mr. Obama’s proposed increase in the tax. Though not a signatory of their letter, Senate Finance Committee Chairman Max Baucus (Mont.), long a critic of the estate tax, has expressed sympathy for the position of Ms. Landrieu and Mr. Pryor.
This is but the latest iteration of an old, old Washington debate. For opponents, the estate tax amounts to confiscation of hard-earned savings, which themselves represent the after-tax proceeds of a productive life. In this view, the levy punishes thrift and imposes heavy costs on small businesses.
What critics of the estate tax overlook is that it helps the government recoup much revenue it loses to a loophole-riddled tax code and that the estate tax is a progressive method of revenue collection. The Tax Policy Center has estimated that 97 percent of estate taxes are paid by the top 5 percent of households on the income scale.
Given the $5 million exemption ($10 million for couples) under current law, and the proliferation of available deductions, few estates actually pay the tax, much less the top 35 percent rate. In 2012, only 300 of 3,600 taxable estates were small businesses or farms, according to the Joint Committee on Taxation. Still, enough wealth from other estates remained subject to the tax that it was a significant source of revenue: estate and gift taxes yielded $11.4 billion in 2011, according to Treasury Department figures.
The current estate tax represents the culmination of the substantial phaseout enacted under President George W. Bush. If Congress does not act, the rate will rise to 55 percent, levied on estates of $1 million ($2 million per couple). That would dramatically increase the number of estates subject to the tax — and, accordingly, raise $532 billion over 10 years. That’s about 3½ times what the government could expect to get if the current rates remained in place for another decade.
Mr. Obama’s plan, to which the Senate Democrats are objecting, would indeed increase estate taxes but not nearly as much as they would rise without congressional action. The president proposes a 45 percent rate applied to estates above $3.5 million. This would raise a projected $276 billion over 10 years. Yet only 700 farms or small businesses would pay, according to Joint Committee on Taxation projections. Given the massive federal debt, it certainly makes no sense to be more generous to wealthy heirs than Mr. Obama’s compromise proposal would be.