American legacy wars
American legacy wars
Published: June 5 2006 03:00 | Last updated: June 5
2006 03:00. Copyright by The Financial Times
Only death and taxes are inevitable, they say. This week America's legislators debate whether to extricate the two by repealing the estate tax - the "death tax" to its critics. The issue generates heated political passions. From the Republican perspective the tax represents a pernicious assault on the American dream that is built on reward for hard work and initiative. For Democrats its repeal would reinforce the country's increasingly entrenched plutocracy and deal another blow to fiscal responsibility. Public opinion broadly favours the Republican view, with most believing the burden unfairly compels heirs to sell the family farm or business.
In fact, it does no such thing. Under the system, estates worth less than $2m (£1m) (or $4m for married couples) are excluded. Any farms and small businesses that are valued above that threshold are eligible for a number of exemptions, including a horizon of up to 13 years to pay it off. In addition, farms are permitted to sharply revalue their land downwards. As a result only a handful of farms are annually subjected to the tax and so far - contrary to conventional wisdom - there is no evidence that any have been compelled to liquidate. As urban (or rural) myths go, the forced farm sale ranks fairly high.
Furthermore, the tax affects far fewer than 1 per cent of US estates. Last year only 13,000 were hit.
However, as it stands the tax needs reform for three reasons. First, it changes from year to year. In 2001 Congress enacted a progressive but temporary phase-out of the estate tax. Under this byzantine measure, the threshold keeps rising until 2009 when it hits $3.5m. It then vanishes in 2010 before reappearing in full in 2011. It is surely unfair to exempt anyone who dies in 2010 but clobber those who die in 2011 with the full whack. There must be a fiscal murder mystery in there somewhere. Second, the tax is crudely designed. Those under the arbitrary threshold pay nothing, while those above it pay 46 per cent. It would be far more efficient to move to a system modelled on income tax bands. Third, by targeting the estate rather than the
heirs, the tax is unjust. An estate of $5m distributed between 10 heirs should be treated differently to one that goes to a sole beneficiary.
One solution would be to adopt a straight inheritance tax as is common elsewhere. The US should retain unified treatment with the gift tax to minimise loopholes. But given public opinion the chances of eventual repeal are higher than sensible reform. That would be a setback. Abolition would deprive the US government of an estimated $1,000bn between 2011 and 2020. As the non-partisan Tax Policy Centre calculates, this would add $3,000 to the existing $28,000 of national debt (divided per capita among 300m Americans). Unlike the death tax, none can escape this "birth tax". If any tax needs urgent reduction it is the latter.
Published: June 5 2006 03:00 | Last updated: June 5
2006 03:00. Copyright by The Financial Times
Only death and taxes are inevitable, they say. This week America's legislators debate whether to extricate the two by repealing the estate tax - the "death tax" to its critics. The issue generates heated political passions. From the Republican perspective the tax represents a pernicious assault on the American dream that is built on reward for hard work and initiative. For Democrats its repeal would reinforce the country's increasingly entrenched plutocracy and deal another blow to fiscal responsibility. Public opinion broadly favours the Republican view, with most believing the burden unfairly compels heirs to sell the family farm or business.
In fact, it does no such thing. Under the system, estates worth less than $2m (£1m) (or $4m for married couples) are excluded. Any farms and small businesses that are valued above that threshold are eligible for a number of exemptions, including a horizon of up to 13 years to pay it off. In addition, farms are permitted to sharply revalue their land downwards. As a result only a handful of farms are annually subjected to the tax and so far - contrary to conventional wisdom - there is no evidence that any have been compelled to liquidate. As urban (or rural) myths go, the forced farm sale ranks fairly high.
Furthermore, the tax affects far fewer than 1 per cent of US estates. Last year only 13,000 were hit.
However, as it stands the tax needs reform for three reasons. First, it changes from year to year. In 2001 Congress enacted a progressive but temporary phase-out of the estate tax. Under this byzantine measure, the threshold keeps rising until 2009 when it hits $3.5m. It then vanishes in 2010 before reappearing in full in 2011. It is surely unfair to exempt anyone who dies in 2010 but clobber those who die in 2011 with the full whack. There must be a fiscal murder mystery in there somewhere. Second, the tax is crudely designed. Those under the arbitrary threshold pay nothing, while those above it pay 46 per cent. It would be far more efficient to move to a system modelled on income tax bands. Third, by targeting the estate rather than the
heirs, the tax is unjust. An estate of $5m distributed between 10 heirs should be treated differently to one that goes to a sole beneficiary.
One solution would be to adopt a straight inheritance tax as is common elsewhere. The US should retain unified treatment with the gift tax to minimise loopholes. But given public opinion the chances of eventual repeal are higher than sensible reform. That would be a setback. Abolition would deprive the US government of an estimated $1,000bn between 2011 and 2020. As the non-partisan Tax Policy Centre calculates, this would add $3,000 to the existing $28,000 of national debt (divided per capita among 300m Americans). Unlike the death tax, none can escape this "birth tax". If any tax needs urgent reduction it is the latter.
posted by Carlos T Mock at 9:00 AM
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