Estate Tax Changes: Don't Be Lulled To Sleep

February 18, 2011

One of the provisions that was included in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the max rate of the estate tax to 35%. It was scheduled to return from a one year repeal with a 55% top rate, so your first thought upon the news of the change would logically be one of relief.
But we need to put the matter into perspective. Since when is a 35% tax on after-tax earnings a cause for celebration? Compared to 55% this 35% seems almost tame, but in reality it is an extremely harsh bite and an instance of double taxation regardless of the rate.
In addition, the selective nature of the tax is patently unfair. The last time it was in effect in 2009 the exclusion was $3.5 million. Now it is $5 million, so it took a baby step in the right direction, but why should some people pay the tax while others don't? Why should a $10 million estate owe $1.75 million to the IRS while a $5 million estate owes nothing?
The polarizing pro-tax talking points involve making villains of Americans who would be subject to the tax, but it could be argued that anyone who buys into this is being misled. Let's say you created something like Facebook or invented a better mousetrap and you wound up with an estate worth a billion dollars. Under this "tax relief" act, $995 million of it would be taxed at 35% as you passed it along to your heirs after your death. So the federal government would take more than $348 million.
If you had the inspiration to create such a wealth building enterprise, would you feel as though the government deserved over a third of what was earned after you pass away? Some say they could afford to lose that much, if they could create that much wealth, but could the money lost to the government be more effectively used in further research and development that would create more wealth and provide jobs for more families?
Beyond that, consider the potential good that the $348 million could do as an inheritance. If it was in the hands of your children they would invest it to stimulate commerce and create jobs. If it goes to the government, it is swallowed up into a black hole of infinite debt and does little good for anyone.
The bottom line is that the matter of the estate tax has not been resolved, the debate goes on, and many Americans are still in favor of a total and permanent repeal of this draconian federal death levy.

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