Reform the Federal Estate Tax, the Right Way
Build Support for a Progressive Estate Tax reform that raises substantial revenue from those most able to pay. The federal estate tax, thanks to effective organizing, is not going away. But there are terrible reform proposals being introduced that would gut the law. Our reform would freeze the amount of wealth exempted at 2008 levels –$2 million for individuals and $4 million for couples –indexes this exemption to inflation; institute a graduated rate structure; and, restore the state credit that encourages states to maintain their state-level estate taxes.
BACKGROUNDER: PROGRESSIVE ESTATE TAX
Action Must Be Taken on the Federal Estate Tax
Under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate tax is being reduced and then will be repealed for one year in 2010. The entire Act sunsets in 2011, restoring the estate tax to a $1 million wealth exemption per spouse and up to a 55 percent rate on the amount over the exemption. Since 2001, advocates of abolishing the tax have pressed for “permanent repeal” but have failed to win enough votes. All agree that Congressional action is required to allow for estate tax planning and predictability.
Why Retain the Estate Tax?
Reform legislation would preserve the federal estate tax, our nation’s only tax on inherited wealth. A century ago, President Theodore Roosevelt advocated for the creation of a federal estate/inheritance tax to slow the build-up of concentrated wealth in the hands of a few. The federal law was instituted in 1916 and has raised substantial revenue over the years from those most able to pay. Retaining and reforming the estate tax will preserve most of $1 trillion in revenue over the next decade, provide a powerful incentive for charitable giving, and reduce inequalities of wealth.
As Bill Gates Sr. has written, “the estate tax is a means by which wealthy people pay back the society and the commonwealth that has made their wealth possible.” Eliminating or irresponsibly reforming the tax will shift tax obligations onto lower income taxpayers or future generations.
Most Reform Proposals are Costly and Irresponsible
There are over a dozen proposals to reform the estate tax. Most are extremely costly and fail to restore some of the best provisions of the estate tax prior to 2001. Many fail to bring back provisions that simplified estate planning and the interaction between state and federal estate taxes. The current debate is happening in the abstract, without any real assessment of the trade-offs and revenue consequences. There is an urgent need for legislation that retains a robust estate tax that raises badly needed revenue in the face of deficits and puts a break on concentrations of wealth.
Key Provisions of A Progressive Estate Tax Reform
$2 Million Wealth Exemption. Compared to estate tax law in 2011, this legislation increases the amount of wealth exempted from the tax to $2 million for individuals and $4 million for couples. This freezes the wealth exemption at its current 2008 level. At this point, the tax would be paid exclusively by multi-millionaires and billionaires – only one out of two hundred taxpayers.
Wealth Exemption Indexed to Inflation. The amount of wealth exempted will be indexed to inflation on an annual basis. This will reduce the need for legislation to revise the exemption level in the future.
Progressive Rate Structure. This legislation would replace the flat estate tax rate with a graduated rate structure at different levels of wealth. The rate would be 45% for estates between $2 million and $5 million; 50% for estate values between $5 million and $10 million; and 55% for estates valued over $10 million.
Restoration of State Credit. Before 2001, the estate tax provided a credit, against federal estate tax liability, for state estate or inheritance taxes. Given this credit, almost all states had some form of estate or inheritance tax, often explicitly tied to the level of the federal credit. The 2001 law reduced and then repealed the credit; since 2001, in about 30 states, the inheritance and estate taxes have either expired automatically (because they were tied to the existence of the federal credit) or have been repealed. Restoring the state credit reduces federal estate tax revenue. But it has the positive benefit of providing an “umbrella” under which states can complement otherwise regressive state tax systems with a progressive estate tax.
Administrative Reforms. The legislation simplifies estate and gift tax planning by relinking the two taxes under uniform rules and by allowing a surviving spouse to automatically acquire the unused estate tax credit of a deceased spouse.
These reforms will strengthen and simplify the existing estate tax.
The Working Group on Extreme Inequality is teaming up with the Fair Economy Action Fund, United for a Fair Economy and other allied organizations to promote this fair estate tax.
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July 16th, 2008 at 2:12 am
I support this proposal.