On repeal of the estate tax

One issue that has notoriously been underreported is the Senate debate over repeal of the estate tax. While many of us don’t expect to inherit anything in terms of economic wealth, this bill will have a major impact on our lives. Here’s why.

The estate tax is a tax on your right to transfer wealth and property at your death.

Before the Bush 2001 tax-cuts, the tax rates on estates ranged from 37% on the low end and 55% on the high end. However, the 2001 tax-cut has two components that essentially cancel the estate tax. For starters, before 2001, estate taxes would not be assessed unless a person’s estate exceeded $1 million dollars. The tax-cut however, does not require estate taxes to be filed unless the estate exceeds the amounts as shown below,

2005: First $1,500,000 in assets
2006-2008: First $2,000,000 in assets
2009: First $3,500,000 in assets

Beyond that, the tax-cuts also decrease the tax rates over time by the following rates,

2005: 47 percent
2006: 46 percent
2007- 2009: 45 percent

So you should see that not only more assets are exempt from taxation, but the few who do actually pay this tax are paying less of it. And in 2010, the estate taxes falls to 0% but there is a sunset provision that resets the estate tax provisions to pre-2001 levels. This is why Bush and his Republican colleagues in the Senate are currently trying to make permanent the repeal of the estate tax. It’s funny how this estate tax debate has been clouded by the gay marriage amendment and the death of Zarqawi.

Nevertheless, this week, the repeal of the estate tax was up for a test vote and once supporters of the bill realized they would be two shorts shy, Senator Jon Kyl of Arizona proposed a compromise that “would exempt the first $5 million of an individual’s estate, or $10 million of a couple’s, from taxation. Estates between $5 million and $30 million would be taxed at rates equal to capital gains, and the remainder would be taxed at 30 percent.” This idea is wrong-headed because Senator Kyl can’t repeal the tax entirely; he is trying to kill the estate tax with the death of a thousand cuts.

Why is this important?

The estate tax is important because it is a significant source of revenue for the federal government. As the Center on Budget for Policy Priorities points out,

“The Joint Committee on Taxation estimates that this would reduce revenues by $290 billion through 2015, including $72 billion in 2015 alone. But this estimate essentially captures only the cost of four additional years of estate tax repeal; the revenues losses associated with 10 more years of repeal — for the period 2012 through 2021 — are much higher, about $745 billion. And when the associated $225 billion in higher interest payments on the debt are taken into account, the total cost of repealing the estate tax for a decade would be nearly $1 trillion.”

I suspect that many of the people who read this blog are under 35, but I could be wrong. In any event, if we were to fast forward nine years, many of you will be married, raising children, and probably taking care of your parents. Now let’s assume that the first figure of tax revenues being reduced by $290 billion through 2015 is true. The current national debt is upwards of $8.2 trillion dollars. It is so bad that Congress had to write legislation to raise the federal debt limit to $9 trillion dollars so we can keep living above our means. Now it’s hard for me to imagine that amount of money so percentages sometimes work better. “From 1975 to 2005, debt, as a percentage of GDP was once at 34.7%, now exceeds 60%.”

This is astonishing because foreign countries, China in particular, are financing our national debt, thereby furthering the allusion that everything is ok. And if you thought the price of gas was high, just wait until foreign countries decide to take on less of our debt.

This says nothing of the amount we are paying for our activities in Iraq. Last I checked the war has cost us $320 billion dollars and the Senate is about to authorize more funding. But whatever happened to the pre-war claims that Iraq’s oil revenues would finance most of the war? Jim Hoagland of the Washington points out,

“Iraq’s oil production limps along below prewar levels. Sabotage and neglect hamper production. Corruption that is aided and abetted by neighboring Arab countries drains revenue. Forced to import $6 billion worth of refined petroleum products this year for the domestic market, the Baghdad government will spend the same amount to sustain its security forces in 2006, according to U.S. estimates.”

Speaking of war, I doubt if neo-conservatives know how to fight the war on terrorism with anything but military force so I doubt it Iraq is the last front. (read more money)

And then, there is the issue of healthcare. Once the baby boomers start to get older, they are going to put a huge financial strain on our healthcare system. This in turn will cause politicians to devote even more resources to healthcare so they can satisfy this demographic. What’s worse is that we can’t adequately handle the load we have now, so when a significant portion of the population needs access to healthcare and prescription drugs, it will be tantamount to an entire city, flushing their toilets at the same time. We have to plan ahead and the repealing or shrinking the estate tax will not help the situation.

Lastly, there is the environment because unfortunately, the earth is not getting any cooler and as a result, we will likely see more storms similar to or stronger than Hurricane Katrina. This no doubt will put further strains on the national budget.

So what I am I saying?

Between the national debt, the war on terror, healthcare, and stronger storms due to global warming, repealing the estate tax is one of the dumbest things Congress could be doing right now. Moreover, Republicans are generally regarded as more frugal than Democrats but this Congress takes the cake, the chicken, and the kool-aid! And whenever Bush is pressed on the budget, he excuses everything on the war on terror. So why does he push his annual tax cuts and why is he aiming to kill the estate tax? If the war on terror is such a burden, then why does the government need less money? Especially when we know that when the government has less revenues, education budgets get tighter, and there is an overall decrease of government investment in services and infrastructure. When Bush started the war on terror, he knew good and well that it would be finished during his Presidency. And like the war on terror, future administrations will have to deal with this tax cut until eventually, American’s will be forced to pay the bill. And when that time comes, there will be calls to sacrifice (in the form of higher taxes) to help keep the American Dream alive. I believe this will happen in our lifetime so do know that the decisions of today will affect you tomorrow.

But even after all of that, I still support the estate tax because there is already an industry of tax lawyers and accountants that do nothing but find ways for the rich to pay fewer taxes. Moreover, only less than 2% of the population pays this tax. My take is that if you are in the top 2% wealth bracket, you can sacrifice a little bit. Of course, I can’t tell people what to do with their money but passing on a huge inheritance to children is foolhardy because generally, the money will make these kids spoiled and less inclined to work. I think Warren Buffet said it best;
“Warren Buffet didn’t disinherit his children because he disapproved of their career choices or their character…His desire was to “force them to carve out their own place in the world.” He was determined to leave them “enough money so they could do anything, but not so much that they could do nothing.”

So stay informed and be aware of how repealing the estate tax will affect you and your future,

Stay up fam,

Brandon Q.

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One response to “On repeal of the estate tax”

  1. Brandon Q. says :

    I found a good follow up article on the Christian Science Monitor discussing the ramifications of repealing the estate tax.

    http://csmonitor.com/2006/0612/p17s01-cogn.html

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