Estate Taxes are a Nice Problem to Have

Extension likely as federal deficit approaches $2 trillion and scheduled repeal appears unaffordable.

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With the federal deficit galloping its way to a post-WWII high, as a share of economy activity, anyone who seriously believes the estate tax will be allowed to disappear next year can take his rightful place on Fox's Are You Smarter Than a 5th Grader? Outright repeal of the tax would represent an estimated $800 billion drain on the Treasury over 10 years, at a time when even a spare $100 billion is being treated as real money in Washington. More likely, we will see a continuation of this year's taxes, which exempt the first $3.5 million ($7 million per couple) and tax the rest at 45 percent. The big fight, if Congress is not exhausted by all the other Big Fights in store for it, will be over whether that threshold should become permanent or be rolled back to generate more tax revenues.

[ Find the Best Places to Retire.] The last time I looked, rich folks were not high on the list of interest groups whose stories played well on Capitol Hill. There remains much Democratic think-tank hostility toward the skewing of personal incomes to wealthier households that occurred in the Bush White House. And high earners are already being lined up to take it right on the chin with higher income tax rates to help pay for health reform. So, asking for a bit more blood would hardly be a surprise.

[See Know the Tax Rules for Charitable Donations.] But there is one statistic involving estate taxes that just blows me away. The current estate tax applies to only 0.2 percent of all taxpayers -- a group estimated to total only 6,000 estates a year. Everyone else -- all 99.75 percent or so -- pay zero estate taxes.

Now, it's a sure bet that many of these 6,000 families have made huge philanthropic contributions to this country, as well as stepping up any number of times to lend their support to many, many good causes. Politics aside, the U.S. is most likely a much better place because of their efforts. But the idea that so much Sturm und Drang is expended on the estate tax is hard to accept when you stop and realize that all this energy is devoted to a policy that directly affects so few people. But, of course, most words devoted to the estate tax are not about those numbers but the larger issue of what has made American free enterprise so effective at creating wealth in the first place. One pro-repeal research paper argued that doing away with the tax would release good ol' U.S. ingenuity to the tune of creating 1.5 million jobs in small businesses. Why this might be so is hard to fathom, given that only about 100 small businesses and family farms are expected to pay estate taxes this year.

The bigger issue by far are the buckets and buckets of red ink that are being poured over the federal budget. Douglas W. Elmendorf, director of the non-partisan Congressional Budget Office, has been "Fiscal Man" in continuing to tell Democratic legislators what they don't want to hear: the budget is broken and all of their health-care reform proposals to date would make things worse, not better.

Of course, with health reform, we're all going to live forever, so the estate tax may fade as an issue. . . .

[See It's Time for Some Life Planning.]