This Article originally appeared at www.americanshareholders.org
With the health care debate raging in the Senate, another fight has been lost in the background: the death tax. It can be confusing to discuss the topic, mainly due to the complexity of tax law. Here is a refresher on the death tax.
- At present, the death tax (another name for the estate tax) sits at 45%.
- It is slotted to expire at 12:00 AM, January 1st, 2010. That is, the death tax drops to 0%.
- The death tax will jump from 0% to 55% overnight, at 12:00 AM, January 1st, 2011—as every tax that was cut under President Bush is hiked again.
Those who want to keep the estate tax—primarily the left—need to see it reinforced before it dies. Not doing so would mean political suicide: if the death tax goes to 0%, and then Democrats decide to raise it again, it will be increasing the rate of the most unpopular tax in America. As such, Congress has a good incentive to do something with the death tax before it expires in a month.
Congressional Democrats have proposed permanently extending the 2009 rate of 45%. While this would technically be a tax cut relative to the permanent 55% rate called for under current law, it would be a very small cut on a terrible tax.
Republicans, on the other hand, are offering full death tax repeal as their alternative. That is, Republicans would like the death tax to drop to 0% in 2010, and stay there forever.
While it sounds improbable, many Democrats from moderate districts and states could be convinced of such a move: the death tax provides negligible revenue considering the problems that it causes. If the left want to pick their poison, they could do a better job of it than the death tax.
The estate tax doesn’t hit the wealthy as often is supposed: most wealthy individuals are able to get around the tax because their holdings are liquid. There is even evidence that the estate tax impedes income and wealth mobility—meaning that the poor are less able to move up in society due to the death tax. Those who can’t get out of such a tax are mostly family businesses, who, upon the death of a loved one, can’t afford to pay the tax without liquidating some of their assets, selling capital, and shedding jobs.
One of the arguments that will be discussed when the estate tax is debated is the economic impact of raising or lowering the tax; those who are seeking a more effective stimulus should begin by looking at full death tax repeal.