The state of estates

The tax-cut deal struck by President Obama and Republican leaders has many congressional Democrats crying foul, complaining that Obama conceded too much in return for a few hundred billion dollars worth of long-sought economic stimulus. They don’t like continuing the tax cuts for the wealthiest Americans, and they howl that the proposed tax rate on multimillion-dollar estates is too low. The first of those provisions is bad policy, but the second is worse: an unnecessary handout to a few thousand wealthy families that addresses neither the country’s sluggish economy nor Washington’s long-term debt problem.

The federal government has taxed estates since 1914, with rates typically over 50% on values over $1 million in today’s dollars. The Bush-era tax cuts reduced the estate tax to zero this year, but it’s scheduled to go back up to 55% with a $1-million exemption next year. Democrats wanted to return to the 2009 level — a 45% rate and a $3.5-million exemption. Republicans, however, persuaded Obama to accept a 35% rate and a $5-million exemption.

There’s no magic to those numbers — they’re just arbitrary points between the GOP ideal of no estate tax and the looming 2011 levels that have little support in Congress. But the Republicans’ basic position on the estate tax is wrong. It’s not a “death tax” that punishes people for socking away earnings they’ve already paid taxes on. It prevents gains on property and other investments from going untaxed as they’re passed from one generation to the next.

Conservatives also contend that estate taxes discourage saving, but there’s scant evidence of that. The personal savings rate in the U.S. continued to decline in the last decade as the estate tax was being phased out. The estate tax may be a factor in savings and investment decisions, but not a very influential one.


It makes sense to tie the exemption to property and investment values, but $10 million per couple seems too high. The rate, meanwhile, should be higher than the one imposed on the highest incomes — 35% — because the exemption (and common tax-avoidance strategies) shields so much of an estate from being taxed. For example, the average rate paid on estates in 2009 was less than 20%, despite the statutory rate of 45%.

The current estate-tax proposal would cost about $250 billion more over 10 years than restoring the 2009 levels. It would be one thing to borrow that money for a growth-oriented tax cut; it’s quite another to funnel it to a small number of wealthy Americans. The administration argues that acceding to the GOP’s demands on the estate tax helped persuade Republicans to accept the administration’s wish list of temporary targeted tax cuts and spending increases to stimulate the economy. One can only hope that if the new version of the estate tax passes, it will prove to be as short-lived as those measures.