Monday, November 22, 2010

It's time to pull the plug on the federal death tax

Today's Boston Globe contains an interesting article on the federal estate tax, which should serve as required reading for everyone who owns a home or small business.

For many years, the state and federal government have levied estate taxes on accumulated wealth when people die. The very purpose of the tax is also its biggest evil - it's deliberately intended to prevent people from accumulating wealth from generation to generation. Proponents argue this tax is how to prevent development of a new class of "robber barons" from hoarding wealth. Opponents say the tax hurts common folk who want to pass on the family home or business to their kids instead of Uncle Sam.

As the Globe points out in its well-written article, the federal estate tax has been phased out in recent years under tax cuts enacted during President Bush's first term. But, due to a quirk in the law, the tax is set to rise from the dead as of January 1, 2011. And, it's going to pack a punch, with a 55 percent tax rate and an exemption of only $1 million (which sounds like a lot of money until you try to value a home or small business).

We think there are a couple of interesting points to make in light of this article:

  • First, we think Democrats in Congress should consider making it part of their lame-duck, end-of-session agenda to either make the repeal of the death tax permanent, or to enact a long-term tax with substantially lowered tax rates and increased exemptions. In terms of tax policy, this would inject predictability and fairness into the tax code while eliminating confusion and inequity that arises when people who die at different times are subject to vastly different tax rates. Politically, it would be a signal by Democrats that they listened to anti-tax and economic sentiment voiced during this month's mid-term elections. Democrats could one-up incoming GOP members by striking first to prevent a tax increase next year.
  • Second, we think Massachusetts lawmakers (particularly those in the GOP) should take a close look at the state tax structure to blunt the effect of any federal tax increase. This is particularly important given facts cited in the article about how the federal tax would affect Massachusetts residents more than people in some other states.
  • Third, we think it's worth pointing out the Globe's mention that some people might actually make end-of-life decisions based on the reemergence of the tax. This is illustrative of a broader point - taxes matter. They have a profound impact on people's lives, and people factor taxes into important decisions. This is especially important in the business setting. Perhaps the Globe will recognize at some point that, if people would be willing to make end-of-life decisions based on the estate tax, they definitely factor things like higher sales taxes and corporate taxes into decisions about whether to live in Massachusetts or to invest to grow jobs here.

It will be interesting to see if repealing or reforming the estate tax will be one of the last acts by outgoing Democrats this year, or if it's one of the first acts of a new GOP House in 2011. Either way, we hope this is one tax that won't be back to stay.

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