Congress weighs estate-tax break for wealthy
BOSTON AND WASHINGTON
More than $40 trillion in personal wealth is expected to change hands in America during the next five decades, as baby boomers and their children transfer wealth to heirs. Congress has to decide how big Uncle Sam's share will be.Skip to next paragraph
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Republican lawmakers hope to permanently reduce the estate tax this summer. The move could allow more of that $40 trillion to escape the tax.
Those who stand to reap the big gains are billionaires, millionaires, and their heirs. But every taxpayer has a stake in the outcome. An estate-tax overhaul could affect the nation's social structure and the tax burden on ordinary Americans for years to come.
"The revenue involved is not trivial," says Joel Slemrod, a University of Michigan economist. "What makes it more important, though, is this is by far the most progressive tax we have. [A large reduction] would certainly change in a substantial way who is bearing the tax burden."
The estate tax has stirred controversy ever since its 1916 launch, but as more Americans grow wealthier – and as the gap between rich and poor grows wider – this once-in-a-generation tax has moved to the political foreground.
Last week, the House – including all but two Republicans and 43 Democrats – voted for a major permanent cut in the tax. The Senate is now considering its own rollback legislation. To those who want to abolish the tax altogether, these moves represent an opportunity to bring their goal one step closer.
Other lawmakers see the new legislation as a welcome middle ground in a contentious debate that has simmered ever since President Bush took office in 2001. It would permanently boost the estate value exempt from taxation above the $1 million level. And a new law could remove what many see as morbid incentives in current law, which make deaths in 2010 financially advantageous.
Under Mr. Bush's 2001 tax cuts, the estate tax rate is being reduced, and the exemption amount raised every year until 2010, when the tax disappears altogether. But after that, current law allows the tax to return in full force: The first $1 million of estate value is exempt, with the rest facing as much as a 55 percent tax.
"Compromise in Congress is the answer," says attorney Sandy Kraemer of Colorado Springs, Colo., author of "60-Minute Estate Planner." "It's critically important that we provide a flow of inheritance from generation to generation. On the other hand, we do not want to see huge amounts of wealth pooled in families that can buy and sell elections."
At the extremes on this issue, he says, are socialism and feudalism. A total confiscation of estates would undercut America's traditional capitalistic incentives, hurting the economy. By contrast, absent any tax on wealth or estates, a financial aristocracy is likely to gain increasing clout. The tax also provides substantial revenue to the US government – though its $24 billion in 2004 revenues were dwarfed by the $990 billion brought in by the income tax. It also provides an incentive for charitable giving and for people to plan for the transfer of their estates, proponents of an estate tax add.
Between the extremes lie a wide range of options. The Republican-led Congress hopes to lower the tax significantly. The move would primarily affect the very wealthiest Americans. Just 62,718 estates filed taxes in 2004, the most recent year for which IRS records are available. The cumulative value of those estates was $193 billion.
A year ago, the House voted to permanently repeal the estate tax, but it fell three votes short in the Senate. The new House bill is designed to break the deadlock. Instead of eliminating the tax as of 2010, the House bill would boost the exemption to $5 million for an individual's estate or $10 million for couples. After 2010, the exemption would be adjusted yearly for inflation.
Above those amounts, estates up to $25 million in value would be taxed at a rate equal to the tax on capital gains (now 15 percent). Estates above $25 million would be taxed at twice the capital gains rate.