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Estate tax fight hinges on money, morality

Senate action is key, as Jon Kyl pushes a compromise plan this month, making most of the tax cuts permanent.

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Both sides of the debate often frame their arguments in terms of morality. As Senator Kyl's website puts it: "The death tax is fundamentally unfair. It discourages hard work, entrepreneurship and savings, while rewarding consumption. It imposes tremendous planning costs on families, especially those owning small businesses and ranches."

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Proponents of repeal used to list "family farms" as well. But they had great difficulty finding any farm family that had to sell its farm in order to pay the estate tax.

Opponents of repeal, on the other hand, have emphasized the loss of federal revenues from ending estate taxes. The 2001 act was passed when it looked like the federal budget faced huge surpluses in the years ahead. Since then, the budget has sunk into large deficits, making "fiscal responsibility" an argument used to support retention.

Repeal would cost roughly $1 trillion in the first 10 years of extension, 2012 to 2021 - $745 billion in lost revenues and $225 billion in increased interest payments on the national debt, notes the Center on Budget and Policy Priorities (CBPP).

Senator Kyl's proposed compromise would cost about 90 percent as much in revenues, says Joel Friedman, an expert at CBPP. The largest estate tax cuts would go to the largest estates.

The revenue losses would result in greater spending cuts for the nation's safety net programs and other popular programs, Mr. Friedman argues.

There's been another change since 2001. Many of the 1.3 million charities and foundations that benefit from inheritances and other donations - including museums, universities, and churches - have shifted from sitting on the fence on the estate tax, for fear of offending rich donors, to active opposition to repeal.

To escape the estate tax, many upper-income families donate heavily to charitable groups, and nonprofit advocates worry that getting rid of the tax would reduce this incentive. A study by the Congressional Budget Office calculates that repeal of the estate tax would reduce charitable bequests by 16 to 28 percent. That amount, in 2000, would have meant a loss of $13 billion to $25 billion, says Diana Aviv, president of Independent Sector, which represents 500 nonprofit groups.

Ms. Aviv argues the estate tax moderates the growing gap between rich and poor. The revenues of the tax can help provide more opportunity for those not inheriting great wealth, she says.

"That is a moral argument ... a pretty strong one," she says.

Graetz notes that the American ideal is that people should start out in life from a relatively even position and face equality of opportunity. In that sense, the estate tax is the most progressive of taxes.

Today, the heirs of less than 1 in 100 estates pay any estate tax at all, since $1.5 million per individual and $3 million per couple of any inheritance is currently exempt. The effective rate in 2003 averaged about 19 percent of the estate, and less than that by now.

Most Americans disapprove of a hereditary aristocracy. But Americans are also enormously optimistic, with many believing that they will reach the top 1 percent in income during their lives, surveys show.