The push by the "investor class" to end the estate tax is continuing. Frist has vowed to bring repeal to a vote this year in the Senate. Meanwhile, repealers have taken the effort to the state level. Connecticut, Kansas, Maryland, New York, Oklahoma and Virginia currently have proposals on the table to cut back or repeal their estate taxes. See this alert at United for a Fair Economy.
Elimination of state estate taxes will have a significant impact on state budgets that are just beginning to recover from several years of severe restrictions. In New York, for example, Pataki's proposal to repeal the estate tax will cost the state about $1 billion a year. That's a significant amount in a state with huge infrastructure and educational needs. The argument for repeal in New York is about as unreasonable as it is anywhere else. The state estate tax already exempts the first $1 million in the estate and then taxes the estate above $1 million at graduated rates that start very low. An estate with slightly more than $1 million that is taxable (i.e., more than $2 million of assets in the estate, since the exemption amount is not taxed) will pay New York estate tax at about 6.4%, for a total of about $38,000. See this fact sheet with information prepared by the Center for Budget and Policy Priorities.
Why have so many ordinary Americans who would never be liable for the estate tax been convinced that repeal makes sense? It is hard to say for sure. Part of it may be a lack of understanding of the sharp inequality of income and assets that exists between those in the top brackets and the majority of Americans. Another reason may be the pervasive belief in the American myth of income mobility. See this set of interactive charts from the New York Times series on class in May 2005. Even though some people do move from the lowest income brackets to the middle income brackets and even higher, mobility hasw slowed in the U.S. compared to Denmark and some other European countries. And very few adults who make $30,000 annually today can truly expect to become millionaires before they die. Yet the myth is hawked endlessly in television game shows, romance novels, Las Vegas casinos and lottery ads. It would not be surprising that ordinary people who dream of winning the big one want to hang on to every penny of it and do not understand how the estate tax exemption levels work.
The most likely reason for people to support repeal of the estate tax at the federal and state level, however, is the misleading information about families being hurt. For years, there have been stories about ordinary families on family farms losing their farms because of federal estate taxes. These stories generate sympathy: most people do not think that families should be pushed off their land because of inability to pay taxes. The only problem is, these stories are not grounded in fact. Very few family farms are wealthy enough to be subject to the estate tax, and of those that are, the amount of the tax is relatively small and can be paid out of liquid assets. Even for those that do not have cash on hand, there are special provisions in the tax laws that permit the beneficiaries of the estate to take as long as 14 years to pay off whatever taxes are due.
Here's what the UFE materials say about the myth of loss of family farms due to estate tax payments.
A 2005 report by the Congressional Budget Office (CBO) lays to rest the myth that the estate tax imposes a significant burden on America’s farmers and forces many of them to sell their farms to pay the tax. In a thorough analysis of IRS data, CBO finds that with the amount of an estate that is exempt from the estate tax in 2006 ($2 million), exceedingly few farms will face the estate tax. In addition, CBO finds that only a miniscule number of estates could possibly be in the position of having to sell any part of the farm to pay the tax.
CBO found that if the 2006 exemption level of $2 million had been in effect in 2000, only 123 farm estates nationwide would have owed any estate tax. The CBO report also found that of the few farm estates that would owe any estate tax, the vast majority would have sufficient liquid assets (such as bank accounts, stocks, and insurance) in the estate to pay the tax without having to touch the farm. For instance, at a $2 million exemption level, only 15 farm estates in the entire nation would have owed estate taxes in 2000 that exceeded the liquid assets of the estate. UFE (emphasis added).
I think that repeal of the estate tax would be a terrible mistake. The elite classes would be able to pass their wealth undiminished to future generations, contributing to an ever expanding chasm between the haves and the have-nots that inevitably translates to economic and political clout. If savings plans were also expanded, permitting the wealthy to horde even more of their wealth in ways that permit tax-free savings, ordinary workers would have fewer and less generous pension plans and health care plans for their needs. If capital gains and dividends rates were reduced permanently (and then later reduced to zero as many have suggested), the tax burden would be borne solely by those who labor for their income. Instead of moving up into that mansion in Beverly Hills, ordinary Americans might find themselves falling out of the middle class.
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