Tax the heirs of the rich (at least of few of them)

Efforts to keep the estate tax would help trim looming US deficits.

By , Economics columnist

The famous American philanthropist Andrew Carnegie believed inherited wealth spoiled the heirs. "I should as soon leave to my son a curse as the almighty dollar," he said more than a century ago.

Most of the rich apparently have a different view today. They do not want Uncle Sam to take a sizable chunk of their wealth after they pass on.

Before the end of this year Congress must decide what to do with the estate tax, known by its critics as the "death tax." The Bush tax cuts of 2001 shrank the estate tax year-by-year, until it was to fully disappear in 2010, only to be resurrected at the higher 2000-year rate in 2011. This freaky plan was an end run around a Senate rule that tax cuts must be paid for in future revenues.

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"Nobody wants to see how people respond to an estate-tax holiday," says Leonard Burman, an economist at the Urban Institute, a Washington think tank.

All sorts of scenarios are being imagined, such as people putting sick relatives on life-support machines late this year, or next year somehow hastening the departure of their rich beloved.

In his budget for fiscal 2010, President Obama assumes that the estate tax will be frozen at the 2009 level. Only estates worth more than $3.5 million would be taxed at the rate of 45 percent and only on sums above $3.5 million. Widows and widowers would continue to be exempt from paying the tax on the estates of their spouses.

Under that regime, an estimated 15,400 executors would need to file returns, according to a study by Mr. Burman and two other experts for the Tax Policy Center. And heirs of only 6,200 multimillionaires would have to pay any estate tax at all. Because of the basic exemption, charitable giving, and other exemptions, the effective average tax rate on an estate would be much lower than the marginal 45 percent. Only about 550 small-business owners or farmers faced the estate-tax burden last year.

Despite the tiny number of estates subject to this tax, it is already rousing considerable opposition. Chuck Collins, a scholar at the progressive Institute for Policy Studies (IPI), suspects that six or seven Democrats in the Senate may join Republicans in attempting to weaken the Obama estate-tax proposal when it comes up for a vote, perhaps in the fall.

Of course, the Senate itself often has been dubbed a "millionaires club." Further, many members of Congress depend hugely on the wealthy for campaign donations.

One reason for opposition, besides self-interest, may be ideology – a desire to keep the government's hands off estates. But Mr. Collins suspects that politics and pragmatism could overwhelm ideology this year.

The current financial crisis with its scandals over bonuses and extremely high executive pay has diminished the popularity of the wealthy.

Sam Pizzigati, a colleague of Collins at the IPI, sees a "demystification of the super-rich in the past 12 months," with much of the blame for the crisis laid on Wall Street traders and bankers.

Second, the estate tax is one source of revenue, perhaps at least $30 billion a year, that could make a dent in the $1 trillion-plus deficits seen ahead. The Joint Committee on Taxation of Congress estimates complete repeal of the tax would cost Washington $670 billion through 2018.

Mr. Pizzigati calls the Obama proposal "weak" and its 45 percent marginal rate a "bargain." He figures the estate tax, which is more progressive than the income tax in its higher burden on the really wealthy, would moderate the 25-year trend for concentration of wealth at the top of the income scale and help cut down the "American aristocracy" of the rich to a democratic size.

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