The House and Senate may soon begin debate on what to do with the federal estate tax. If Congress fails to act before January 1, 2010, current law calls for death taxes to disappear entirely for one year before returning in 2011 at a top rate of 55 percent and a $1 million exemption of taxable estate. The 2009 tax rate is 45 percent, and the exemption stands at $3.5 million per taxpayer.
What should Congress do? Some Members want to permanently "fix" the death tax by reducing the top rate to 35 percent, which some pro-death tax policymakers suggest is a rate wealthy taxpayers could "afford." However, this would be the wrong move for Congress to make. Instead, policymakers should do what their voters want them to do, as revealed in poll after poll: They should repeal this tax and kill it, once and forever.
Punishing Hard Work
Americans of all walks of life sense the deep injustice of federal death taxes and the fundamental immorality of bedrock public policies that tell people one thing and do another. Policymakers say, on the one hand, that that if you work hard, save your money, and generally do the right things in your daily life, you will succeed in the U.S. economy. On the other hand, however, these same policymakers support the federal death tax, which has the power to nearly confiscate these hard won economic gains once success is attained.
As Members of Congress consider whether to retain federal death taxes, they should ponder the principal reasons why they should join prior Congresses and repeal this tax.
The Nightmare of the American Dream
The federal death tax is, indeed, the nightmare of the American dream. Not only does it undermine the promise of American economic life, but it strikes hard at those aspects of economic activity most important to those just starting their careers or struggling to climb up the economic ladder: It strikes at job creation and income growth.
William W. Beach is Director of the Center for Data Analysis at The Heritage Foundation.
This peculiar feature of American tax law stems from a scoring by the staff of the Joint Committee on Taxation just a few days before House floor debate of the House Ways and Means chairman's tax bill. The score indicated that the House's budget resolution had not allocated enough funding for permanent repeal of death taxes while also lowering other tax rates and changing the tax base as elsewhere contemplated in the 2001 tax legislation. Given that the Senate had adopted a similar amount for tax cuts, the chairman's mark had to be quickly redrafted in order to provide promised tax relief and avoid a budget point of order. As a result, repeal of the federal death tax occurred in only one year (2010) as opposed to being permanently repealed before coming back at pre-2001 levels in 2011. By doing this, the legislation's managers stayed within the amount of tax relief that Congress had earlier authorized.
Recent work by Douglas Holtz-Eakin and Cameron T. Smith present an argument that a repeal of the estate tax would result in job growth among small businesses of 1.5 million jobs. See Douglas Holtz-Eakin and Cameron T. Smith, "Changing Views of the Estate Tax: Implications for Legislative Options," American Family Business Foundation, February, 2009, at http://www.nodeathtax.org/files/AFBF_Holtz_Eakin_2009.pdf (November 7, 2009).