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Should estate tax rise in a 'fiscal cliff' deal? Why some ultra-rich say yes.

While much of the focus in the 'fiscal cliff' debate has been on income taxes, the group of wealthy Americans says an estate tax 'promotes democracy by slowing the concentration of wealth and power.'

By Staff writer / December 11, 2012

Senate Minority Leader Mitch McConnell, R-Ky., right, speaks with reporters following a GOP strategy session at the Capitol in Washington, Tuesday, with from left, Sen. John Barrasso, R-Wyo., Sen. John Thune, R-S.D., and Sen. Roy Blunt, R-Mo.

J. Scott Applewhite/AP

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A number of prominent wealthy Americans called Tuesday for a hike in the estate tax, as a way of raising new revenue in an era of high federal deficits.

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Advocates of the move include former Treasury Secretary Robert Rubin, John Bogle of the Vanguard mutual fund group, and Bill Gates Sr., an attorney whose son co-founded Microsoft Corp.

The estate tax is one of the big question marks that is unresolved in talks over the nation's "fiscal cliff," the sudden tide of tax hikes and federal spending cuts that are poised to occur on Jan. 1 unless President Obama and Congress can agree on a new fiscal plan. The goal of the current negotiations is to avoid sending the economy back into recession, while also setting a course to reduce federal deficits over time.

"We believe it is right to have a significant tax on large estates when they are passed on to the next generation," the group of wealthy Americans said in a signed joint letter. "We believe it is right morally and economically, and that an estate tax promotes democracy by slowing the concentration of wealth and power."

The signers also included former President Carter, former American Airlines CEO Robert Crandall, and billionaire investor Warren Buffett. The group United for a Fair Economy promoted their appeal.

So far, much of the fiscal-cliff discussion has focused on various ideas to raise more revenue from the rich via the income tax, not the estate tax. But the estate tax is very important, too – in the amount of federal revenue at stake – and it is very much in play politically.

If Congress does nothing, the tax that's levied for passing wealth from one generation to another will rise from a 35 percent rate this year to 55 percent next year. Few American families owe the tax, because current policy exempts estates worth up to about $5 million from the tax. But if the current policy expires as scheduled, the exemption would decline to cover just $1 million in assets.

President Obama has argued that the estate tax should rise from 35 percent to a 45 percent rate, with an exemption of $3.5 million next year. Many Republicans, by contrast, have long sought to eliminate what they call the "death tax."

The tax isn't particularly popular with the American public, either. A new Christian Science Monitor/TIPP poll, which asked US adults about a range of fiscal options, found very low support for raising the estate tax to the level Obama proposes. Only 24 percent of Americans would approve of that move, the poll found.

That made the idea less popular than a range of other revenue-raising options, including higher income taxes for the rich and introducing a new tax on carbon emissions. Even among Democratic respondents to the poll, only 32 percent favored the Obama idea.

At the same time, backers of the estate tax say that, at a time of rising income inequality, the tax serves both to raise revenue and to offset the growing concentration of wealth.

And with large federal budget deficits in focus, substantial revenues are at stake. If the tax reverts to its pre-2001 level next year as scheduled, an estimated 53,000 estates would owe about $40 billion in tax, the nonpartisan Tax Policy Center has estimated. The Obama-proposed estate tax level would bring in about $22 billion in revenue from 7,500 estates.

Over 10 years, the amounts of revenue at stake, while a bit smaller than those at play in the negotiations over income taxes for the rich, total hundreds of billions of dollars.

The joint letter signed by wealthy Americans Tuesday called for an estate tax "beginning at 45 percent [for estates larger than $4 million] and rising on the largest fortunes."

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