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Lay 'death tax' debate to rest

The tax currently hits fewer than 3 in 1,000 estates and has exemptions and deferments for the rest. Yet it consumes enormous mind share in Washington, including a cut proposed this month.

April 13, 2009|MICHAEL HILTZIK

Everybody's familiar with Ben Franklin's old saw about nothing being certain but death and taxes. But how about the "death tax"?

That's the loaded term employed by opponents of the estate tax, which has been part of the federal tax code for more than 90 years and the subject of furious repeal campaigns for almost that long.

Thanks to lobbyists and legislators looking out for the welfare of the richest Americans, the tax currently hits fewer than 3 of every 1,000 estates every year and bristles with exemptions and deferments for the rest. Its contribution to the federal treasury is about 1% of all revenue.

Yet it consumes enormous mind share in Washington. This month, a new tax-cut proposal from Sens. Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) won Senate approval. The resolution would raise the exemption on taxable estates to $10 million from the current $7 million (after the death of both spouses). It also would cut the rate charged on the nonexempt portion to 35% from the current 45%.

The tax is currently set to fall to zero for 2010 and return with a $1-million exemption and a 55% rate in 2011; President Obama proposes merely making today's exemption and rates permanent.

Arguments against the estate tax rank as the most special of special pleading, considering that more than 99.7% of all estates already are exempt. Perhaps 3,000 Americans who died in 2007 left estates valued from $7 million to $10 million; Lincoln and Kyl would have extended the exemption to them. As for those left to carry the burden, the number of taxpayers who died in 2007 leaving estates worth more than $10 million was 1,700. Their average estate was $31.6 million. Lincoln, Kyl and their colleagues actually wasted time on the Senate floor to give people like this a new tax break.

But then Kyl represents a state with a lot of wealthy retired sinus patients and Lincoln a state brimming with billionaires coincidentally bearing the same last name as the founder of Wal-Mart.

Even financial planners for the affluent acknowledge that many taxpayers are excessively concerned about the estate tax.

"A lot of people afraid they are going to be hit by it are completely out of the system" because of the exemption, says Mary Ann Mancini, head of the private client group at law firm Bryan Cave in Washington. "It resonates with people more on an emotional basis than a logical one."

No kidding. On the website of the Policy and Taxation Group, an anti-estate tax outfit founded by an Orange County wealth manager, you can find comments from taxpayers like this: "If I died today, I'd pay about $200,000 in death tax."

I don't want to get too metaphysical here, but if I could be in a position to pay the estate tax even after the undertaker performed his magic on my carcass, I would be happy to write the check.

You'd expect fiscal conservatives in both parties to embrace the estate tax. After all, it generates revenue today to avoid sticking future generations with our expenses, which is a conservative mantra.

The tax also upholds the cherished national principle of self-reliance. As the writers of the 2002 book "Wealth and Our Commonwealth" put it: "There is something fundamentally American about the notion that what people do with their lives is more important than the station of birth. . . . We should strengthen the tax, not eliminate it."

Lest anyone think the book was the product of wild-eyed leftist socialist types, it's my duty to point out that the lead author is a Seattle attorney named William H. Gates Sr., whose son is the founder of Microsoft.

The repeal lobby has carried water for years for the biggest payers of the estate tax, wealthy families including the Gallo wine and Mars candy clans. But their strategy is to misrepresent the estate tax as something more broadly based.

One clue is the very term "death tax." According to "Perfectly Legal," David Cay Johnston's 2003 book about the tax code, it was seized on in the 1990s by Republican consultant Frank Luntz, a master of the black art of political newspeak, to make working-class Americans think it might apply to them.

Among the opponents' key talking points is that the estate tax is unfair double taxation, because the federal government has already taken a cut out of the assets being left to heirs.

But that's a red herring. Most of the assets in taxable estates (85%, according to the IRS) are capital holdings such as stocks, bonds and other property on which the owner has never paid federal tax. In any case, so what if it were taxed twice? It's not unusual for income in the U.S. to be taxed multiple times -- don't we all pay income and sales taxes on some of the same dollars?

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