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Tax Professor Calls Expiration of Estate Tax “Congressional Malpractice”; Doubts Quick Extension Is Forthcoming

2 min readBy: William Ahern

Against all predictions, Congress has repealed the federal estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. even though a congressional majority favors keeping it.

The repeal began almost 9 years ago when the 107th Congress enacted a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cut in May of 2001. That so-called Bush tax cut set in motion a long, phased-in reduction of the estate tax, culminating in 2010 with total repeal. When Democrats won the congressional majority in 2006 and then the presidency in 2008, every tax analyst considered it a foregone conclusion that repeal would never be permitted to occur.

Professor Michael Graetz calls it congressional malpractice and questions the assertion by Senate Finance Committee Chairman Max Baucus that the Senate will act quickly in the new year with a retroactive extension.

“If Congress couldn’t do it this year, why will they be able to do it next year?” says Prof. Michael Graetz of Columbia University, who worked both at Treasury and for Congress. He calls the lapse “congressional malpractice.”

Retroactive income tax changes are bad enough — they screw up tax planning and economic decision-making — but minor retroactive changes are tolerable because we don’t file our income tax returns until the following year. Estate taxation is quite different. People with taxable estates will die tomorrow and every day of 2010, and executors are supposed to rely on the law as it stands. Would the federal government really try to collect tax revenue that had already been lawfully distributed to heirs or charities? The Wall Street Journal is quoting some angry estate tax lawyers.

As the AP reported recently, the House passed an indefinite extension of the estate tax at the 2009 rates two weeks ago. Since then, House Democrats have proposed a variety of shorter extensions, ranging from two months to a year. The Senate, however, has not been able to come up with enough votes to support any of the proposals.

Alarmist predictions about how unfair repeal is are terribly overblown. The estate tax is preposterously complex and imposes an enormous compliance burden for the sake of collecting a very small amount of tax revenue. Much of the so-called lost revenue will be recouped through larger income tax collections. Those will be comprised partly of higher capital gains taxation as the so-called step-up provision is repealed, too, and also from higher income taxes as people may leave more of their estates in the hands of taxpaying entities.