The estate tax has been around since 1916 and the gift tax since 1924. Many issues have always surrounded these taxes including their purpose, the planning that takes place to reduce them, their relationship to the income tax (particularly the exclusion for gains at date of death), and the small amount of revenue these taxes produce. As the law stands now, the estate tax will be gone in 2010, but will return to its pre-2001 form in 2011 unless changes are made. The 2011 rate will be 55% on estates valued at more than $1 million. At 2008 rates of 45% on estates worth over $2 million, only about 1% of individuals owe estate tax. The tax generates less than 2% of total federal tax revenues (Tax Policy Center).
Many family-owned businesses argue for repeal of the estate tax because if it applies to the owner, it may result in liquidation of the business assets to pay the tax rather than allowing the business to be passed onto heirs. Some very wealthy individuals - most notably Bill Gates and Warren Buffet, think the tax should stay. Mr. Buffett notes that the tax should not be called a "death tax" because it only affects about 1 out of 200 estates. He thinks the tax is needed to help bring equity to the tax system. He is also concerned that repeal will cost the government $24 billion which would provide more help to the "23 million households in the United States with $20,000 or less of income" than it will hurt the few wealthy estates (he suggests giving these 23 million households a $1,000 credit if the government has an extra $23 billion to spare). Any change to estate and gift taxes arguably needs to consider the income tax exclusion for gains at death and overall equity of the system.
The Senate Finance Committee held a hearing on the estate tax in November 2007 and heard from a few small business owners and Mr. Buffett. There is a nice summary of estate tax debate issues in a 2005 USA Today article.
What do you think? Should the estate and gift taxes be repealed? If yes, should any income tax or other changes be made?
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5 comments:
Yes. The estate and gift taxes should be repealed.
1. Minimal impact on federal revenue as estae and gift taxes are just a small portion of total federal tax revenues.
2. High compliance costs. It increase tax plannings and annual tax return fee for taxpayers. It also increases heavy administrative burdens and costs for IRS.
3. Economic Distortions impacts progressivity. The estate and gift tax falls on wealthy estate holders. However, the economic incidene is borne by others. This economic distrtion discourages savings and reduce the incentive to invest for small business taxpayers.
A complete repeal will reduce compliance burden for both IRS and taxpayers. The reduction of costs lead to increase productivity and jobs.
If yes, should any income tax or other changes be made?
The income tax should follow the step-up basis when the assets were transferred by one individuals to his or her heir. This encourages taxpayer to hold appreicated assets to avoid life-time capittal gains.
An immediate repeal of the federal estate and gift tax would forece states to establish their won estate and inheritance tax system that could end up complex and costly.
I do not think that the estate tax should be repealed. I think that there may be benefits in some reform to the current estate and gift tax system, but a complete repeal would negatively affect the tax system placing more burden on lower income taxpayers. Even though it is a small portion of federal revenues it is a substantial amount of revenue. And that amount of revenue is from a very small percentage of taxpayers so even though there are many audits of estate tax returns the numbers are much smaller than other types of tax returns. In addition, by performing so many audits we are able to minimize the tax gap. One change I would make is to figure out a way to further prevent aggressive estate tax planning that takes place.
Advocates of a repeal of the estate tax claim that elimination of estate tax would lead to increased jobs as a result of increased private saving available for investment. This does not appear to be backed up by solid date and there is uncertainty that there would be positive or negative impace to private saving. Replacing the estate tax revenue through the income tax system also makes no sense as the income tax system is already too complex. If wealthy individuals who are the ones paying the estate tax like Bill Gates and Warren Buffett concede that a repeal would be too costly then clearly it is not a good solution.
Sources:
http://www.cbpp.org/cms/index.cfm?fa=view&id=2861
http://wills.about.com/b/2009/06/04/estate-tax-repeal-update-what-does-portability-of-the-estate-tax-exemption-mean.htm
I believe that the estate tax should remain. If we are to continue to have a progressive tax system, then one would be hard-pressed to find a tax more progressive than the estate tax. Although called a “death tax” by its detractors, it can be more appropriately described as a wealth tax. This goes to the heart of a progressive system, requiring that those with more assets or a greater ability to pay, share a larger percentage of the tax burden. Repealing the estate tax would shift a lot of the revenue shortfall to those who have a reduced ability to pay. One’s ability to pay is an essential part of our income tax system and can be seen with the existence of a personal exemption.
In calling for its repeal, it can be strongly argued that the estate tax violates number of the principles of good tax policy (http://www.cob.sjsu.edu/nellen_a/PrinciplesGoodTax.pdf). Policies such as the tax gap from non-compliance, simplicity, neutrality, and most recently uncertainty about the future of the tax, all appear to be violated. However, as previously stated, the adherence to the equity and fairness principle seems to trump all of these negatives in our current progressive tax system – at least as of today. Another policy principle which the estate tax adheres to is the issue of appropriate government revenues. As it exists now, it is estimated that the estate tax generated $28 billion in 2008. And in our current deficit-growing environment, every dollar may be needed.
The overall U.S. national deficit shouldn’t be taken lightly. As of this posting, it stands at $12.7 trillion dollars (http://www.usdebtclock.org/). And with the recent passage of the $940 billion Health Care Reform bill, that number could easily go up. Although to be fair, the CBO has released initial projections claiming that the plan could reduce the deficit by $143 billion over the first 10 years. (http://money.cnn.com/2010/03/20/news/economy/cbo_reconciliation/index.htm). Nevertheless, other entitlement programs such as Medicare and Social Security create a significant strain on government revenues. While the estate tax may not resolve any of these financial issues, the revenue it provides helps in at least an incremental way. Certainly, repeal and elimination of this revenue would be a net negative to the overall deficit. The Joint Committee on Taxation estimates that repeal of the estate tax would reduce revenues to the tune of $290 billion through 2015, with estimates of $745 for the years 2012 through 2021 (http://www.cbpp.org/cms/?fa=view&id=1223). Taking into account our economic situation alone, I believe that the estate tax should remain in some capacity. Reform can be a way to help find a common middle-ground between those calling for complete repeal and those arguing for its existence. By raising the exclusion amount, or reducing the tax rate, perhaps fewer “small business” owners would be affected by the estate tax, and it would allow those truly having a greater ability to pay, to help foster our progressive tax environment.
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