The Estate Tax Is All but Dead

The House battle over President Obama's tax deal with Republicans may hinge on a passionate fight between Democrats and Republicans over whether to preserve a small piece of the estate tax on inherited wealth.

But for all the heat, the battle has for practical purposes been over for a long time. Even though Republicans warn that the tax will force families to sell their businesses and farms, and Democrats are venting about extending a costly tax break for the rich, the gap is almost invisibly small to most people. The bottom line: Republicans won and Democrats lost.

Under the Bush tax cuts of 2001, the estate tax was pared back year after year until it disappeared for just one year in 2010. If Congress doesn't act, the estate tax automatically jumps back to life to the rates before 2001.  

But the fight now is not about whether to junk the estate tax or bring it back in full force. The fight is over whether it should apply to a minuscule slice of the nation's richest families or an even more minuscule slice of the nation's super-rich families. No matter what happens, the estate tax is set to be abolished for more than 99 percent of American families.

Under the Democrats' original proposal, the estate tax would have been reinstated at the levels of 2009. Their plan would have abolished the estate tax for any estate worth less than $3.5 million, or $7 million for couples. That would have excluded all but about 6,500 families, about 99.8 percent of the total, according to estimates by the nonpartisan Tax Policy Foundation. The remaining sliver of estates would be taxed at a rate of 45 percent.

The compromise with Republicans would shield about 99.86 percent of households, excluding those worth less than $5 million, or $10 million for married couples. The remaining estates, about 3,600, would be taxed at 35 percent.

Angry Democrats have threatened to strike down what Rep. Chris Van Hollen, D-Md., called "egregious" provisions that provide "a huge bonanza to the wealthiest estates in this country." The cuts come at a time when the income gap is at the highest rate in U.S. Census Bureau records.

Republicans argue that low thresholds and high rates unfairly target small businesses and family farms, where the bulk of an estate's value is derived from real estate holdings. But many researchers say there are a whole host of exemptions and loopholes that, in effect, protect nearly all closely-held small businesses and family farms.

But either way, what Republicans call the "death tax'' would be dead for almost everybody, even if Democrats were to prevail with their original plan. For all the talk about endangered family farms, opponents haven't been able to cite a single case in recent years when heirs to a family farm have been forced to sell out in order to pay their taxes.

"We break down by what estates report business assets and farm assets," said Joseph Rosenberg of the Tax Policy Center. "That is more political myth than reality that this is an overly harsh burden on small businesses and family farms. The truth is that the main benefit goes to large estates."

Rosenberg argues that what results is sophisticated tax planning that minimizes the effect on most estates that could otherwise have been affected.

"Even with a $3.5 million exemption, you're talking about a very small percentage of the population that would ever have to be concerned about this," Rosenberg said.

The two-year patch for the estate tax effectively pushes off the debate until 2012, placing the next stage of debate squarely in the court of the new Republican-controlled House. At that time, the minimal revenue generated from the current bill may give Republicans the opportunity to argue that the estate tax should simply be given last rights and eliminated entirely.

And that may make sense. Even lawmakers who think the government should impose an estate tax in order to prevent the rise of a permanent plutocracy increasingly view the issue as too trivial and too tiring to fight much longer. The tax compromise is likely to increase that perspective.

"If the version that is in the compromise legislation goes through, then you're really at the point where it's almost marginal whether it's worth it to keep it," said Rosenberg.  "My sense is that the GOP ideal estate tax is zero. I think they've been pretty clear about that."