Restore the Estate Tax

How to do it fairly

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One of President George W. Bush’s goals when he entered office in 2001 was to eliminate the estate tax, or “death tax” as opponents would have it. In a spectacular display of incompetence and irresponsibility, which Bush claimed as a victory, Congress voted to phase out the tax over the next decade, then bring it roaring back to its 2001 level the next year. They did this in order to be able to say they’d abolished the tax while hiding the cost in lost revenue over the long-run cost. Few observers believed that wealthy families would actually be allowed to accumulate wealth and pass it on indefinitely with no tax at all, and no one believed that the tax would go to zero then bounce back. Everyone assumed that, at some point over the next decade, Congress would straighten this all out, one way or another.

But a decade went by and nothing happened on this front. In 2001, before the Bush tax cut, a married couple could pass on $1.35 million tax-free--plus whatever extra they might qualify for as a small business or farm or other favored category or loophole. The top tax rate on anything over that was 55 percent. By last year, the first $7 million was exempt for a couple and the top tax rate on the rest was 45 percent. Now it’s zero. Next year, supposedly, it will revert to 55 percent with an exclusion of $2 million.

Although Congress did nothing while the tax was going down, and although it has done nothing while the tax sits at zero, it is especially hard to believe that Congress will continue to do nothing when this tax shoots up. Furthermore, even as a believer in the estate tax, I have to confess that the leap from zero to 55 percent seems a bit of a jolt. Maybe this absurd rollercoaster was part of a deliberate strategy. To compromise from a starting point of zero will produce a lower ultimate result than compromise from a more realistic rate.

What debate there has been about the estate tax has concentrated on where the line should be drawn between the merely prosperous and the actually rich. The feeling seems to be that only the actual rich should be subject to the estate tax. I think this misunderstands what the estate tax should be about. It is not intended to punish people for having a lot of money. It is intended to raise the money we need to run the government, and to do so as fairly as possible. In 2008, very near its low ebb, it raised $25 billion. To the extent it sends a message, the message should be that we’re all in this together, to the best of our ability, and some of us are more able than others.

So the emphasis, in restoring the estate tax, should be the opposite of what it has been. It should be on lowering the initial exemption, rather than on raising the tax rate. Obviously, though, a rate of zero is insufficient.

This article is from the archive of our partner The Wire.