Unknown to many Americans is the taxation of their assets after death. The estate tax, also dubbed the “death tax” or “inheritance tax,” is a federally imposed levy on an individual’s possessions (liquidity, property, etc) at the time of their demise. Additionally, various states impose a “pick-up” tax on an estate, pursuant with Internal Revenue Code Section 2011, which allows them to tack on extra tax yielding in state revenue.
In 2001, congress passed the Economic Growth and Tax Relief Reconciliation Act, which repealed the estate tax for the year 2010. In addition to this repeal, it emplaced various conditions on the estate tax which would raise the exclusion amount (amount of non-taxable assets) and gradually lower the top tax rate until 2010.
YEAR EXCLUSION TOP RATE
2001 $675,000 55%
2002 $1 million 50%
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 $0 0%
2011 $1 million 55%
In 2011, the repeal will be rescinded and the exclusion/top tax rate will reset to near-2001 levels, with a 55% top tax imposed on assets over $1,000,000.
The estate tax works by deducting the current exclusion value from the gross value of an estate. The excess amount is then taxed at the current, tentative rate. For example, an individual, assuming no deductions, who dies in 2011 with an estate valued at $2 million, would pay $435,000 in tax.
There are various deductions (charitable contributions, debt, etc) that would allow an individual to pay less estate tax; furthermore, there are economic mechanisms such as inflation, which silently increase the unadjusted exclusion amount since inception. This means that individuals with an estate of, for example, $1,000,000 in 2001, would have an inflation-adjusted worth of $1,199,464 in 2008. When the estate tax is repealed in 2011, an individual in this situation would be thrown into the eyes of the estate tax, which would collect duty on $199,464 of their assets. Over time, such as 50 years, inflation would matter much more. A house valued at $300,000 in 1950 would be the equivalent of $2,143,568 in the year 2000.
The answer to this problem would be to create an adjusted exclusion value, which would rise or fall with core inflation. Of course, the real question is, should the estate tax be repealed once and for all? In a report by the Congressional Budget Office, in fiscal 2007, the federal government received $2.5 trillion in tax revenue. Of that, only $26 billion, or 1.04%, was from estate taxes.
President-Elect Barack Obama said he would freeze the estate tax at 2009 levels – $3.5 million exclusion at a 45% top rate. Considering 2007 only brought $26 billion in revenue from the estate tax, and its exclusion was at $2 million, it is safe to estimate that the revenue produced by Obama’s plan would be even less than is created currently. 2009 will be a testament to this theory, and Obama’s proposal.
Though the estate tax only concerns a small portion of the population, usually less than 50,000 individuals annually, it infringes on the fundamentals of capitalism and punishes success. Family owned businesses often have to sell their company due to the death of the owner because they can’t pay the strict estate tax. In addition, it also promotes fraud and other methods of hiding liquidity and asset value.
The estate tax is a rigid regulatory policy and hampers domestic growth and fiscal freedom. Proceeds from it hardly rationalize its existence, and when 2010 rolls around the corner, data will show the justification for a permanent repeal. Until then, it is nothing more than a soft tyranny.