Wednesday, April 7, 2010

The Estate Tax

Some national politicians continue to support abolishing the estate tax, a tax on the value of assets at death before ownership is transferred to heirs. The Estate tax has been subject to similar pressures and changes as the federal income tax. Up to 1981 estate tax rates up to 70 percent were applied to the entire value of an estate with only a $50,000 exemption.

Since the early 1980’s Congress has repeatedly reduced the number of estates subject to the estate tax, mostly by raising the exemption. By 2001 the exemption was $1 million and the top tax rate 55%, but 2001 was also the year the Congress agreed to a 10 year phase out of the Estate tax. It is a 10 year phase out because next year, the tenth year, the estate tax is eliminated, but only for one year. The Bush era revisions to the estate tax expire in 2011.

Under the rules that remain for 2009 the first $3.5 million of an estate is exempted from estate taxation and the article reported that only around 100 estates will be subject to any tax, which would bring in $266 billion of revenue despite the small numbers.

At a time of colossal federal deficits the Congress has to make up its collective mind and decide if it wants to amend the current law to avoid losing that much revenue for 2010, when the tax will be zero. The decision for 2010 only applies to one year and only a small amount of revenue, but estate taxes have important social repercussions overtime.

Citizens are not citizens just because they live in the same country and share the same geography. Citizens need to share some common experience to understand each other and cooperate politically and socially. One of those common experiences is the need to finish school and find self supporting work.

If the heirs of the 100 people mentioned above receive $266 billion dollars they have no need to work, ever. They can afford household servants, private tutors, and lavish lifestyles without working and without understanding what other people have to do. They also have enough money to influence media and political agendas and perpetuate their status.

As the matter stands the estate tax of 2011 will be restored to the estate tax of 2001 unless the Congress can agree on new legislation. That was as far as Congress could get toward eliminating the estate tax in the early days of the Bush administration.

Critics in Congress keep pushing to permanently eliminate the estate tax. Eliminating the estate tax will begin building a small class of families with extraordinary wealth that can be diversified around a global economy and permanently protected from market forces.

The term “banana republic” describes a pattern of inequality, usually in Latin American countries, where a few dozen land holders have 90 percent or more of the wealth and the rest live on whatever is left. Despite a well documented increase in income inequality the United States distribution of income and wealth is still a long way from that, but abolishing the Estate tax is a step in that direction.

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