Few taxes undermine the tax principle of stability more than the federal estate tax/death tax. When someone asks us what the rate is, we have to give them this table: Year Rate and Exemption Amount 2001 55% over $675,000 2002 50% over $1 million 2003 49% over $1 million 2004 48% over $1.5 million 2005 47% over $1.5 million 2006 46% over $2 million 2007 45% over $2 million 2008 45% over $2 million 2009 45% over $3.5 million 2010 repealed 2011 55% over $1 million The curiosity of a tax being gradually phased out, repealed completely for a year, then brought back at a higher rate is a result of the 10-year budget window. In 2001, when the reduction package was adopted, Senate budget rules prevented the bill from going beyond 2010. Despite several attempts to make the repeal permanent, the estate tax/death tax remains with us. Unless something is done, families with wealthy relatives on life support will face cruelly perverse incentives in the early and waning days of 2010. As the Wall Street Journal editorial page noted a month ago, President Obama has proposed making the 2009 tax rate and exemption level permanent beginning in 2010. It may or may not come to pass: left-of-center activists grit their teeth at anything short of substantial confiscation of intergenerational wealth; right-of-center activists denounce the tax on top of other taxes already paid on this income, and one that harms capital formation needed for investment. There’s more contradictions on the left side of the issue, where groups simultaneously claim that the estate tax affects virtually no one yet is so important that effective redistribution hinges on it. The truth is that while few estates pay the estate tax, many people are burdened by it. Lots and lots of tax planning goes into protecting assets from the tax, by insurance policies or charitable bequests or gifts or other mechanisms. Even famous rich people who support the tax have sheltered their income from it. The cost and losses to the economy from this tax planning goes far beyond the meager revenues collected by the federal government. But it would at least be nice to know what the tax rate will be a mere seven months from now.
