Insurance, Taxes

The ongoing national debate regarding wealth and taxes took a turn toward reality last week when the House of Representatives decided after much debate and posturing that, yes indeed, the nation's gilded elite will have to pay taxes upon their passing.

Of course, the few thousand people impacted by the House action will pay less taxes than might otherwise have been the case. Perhaps as much as $1 trillion less.

During the past several years the question of whether or not to tax estates has been a hot political issue in Washington. As a matter of principle some are vehemently opposed to a so-called "death tax" and feel estate taxes should be a single number: zero. Others -- equally as a matter of principal -- believe that an end to estate taxes is financially indefensible given that the country has added more than $2 trillion to the national debt under the Bush Administration.

The gist of the House plan -- a "compromise" known as H.R. 5638, The Permanent Estate Tax Relief Act of 2006 -- looks like this:

• There will be no tax on individual estates of $5 million or less, or up to $10 million for the estates of married couples. This means small businesses and farms could be passed along to heirs without any tax.
• Estates valued between $10 million and $25 million would be taxed at the current capital gains rate, or 15 percent. By 2011, the capital gains rate could rise to 20 percent. In essence, the estate tax would apply to $15 million in value ($25 million less $10 million). An estate valued at $25 million would owe Uncle Sam from $2.250 million to $3 million, depending on the tax rate. Heirs would thus receive no less than $22 million, not exactly a hardship.
• Estates valued above $25 million would be taxed at twice the capital gains rate, or 30 percent at today's rates, perhaps 40 percent by 2011.

It's when you get into the big estates that the numbers become interesting.

Imagine a $1 billion estate. Under the House proposal, there would be as much as a $3 million tax on the first $25 million and a max of $390 million on the remainder. In effect, the government would collect $393 million in estate taxes while the heirs would receive $607 million.

While the House measure accepts the taxation of estates, virtually all estates would be exempt. No less important, the tax burden of the very rich would be reduced.

At this time very few estates pay a dime to Uncle Sam. According to the Tax Policy Center, 12,600 estates are expected to pay taxes in 2006. Given that there will be some 2.5 million deaths in 2006, only about 0.0048 percent of all estates will be taxed. If the House bill passes, the number of tax-paying estates is expected to decline substantially.

The reason the House broke down and decided to tax estates is that if they did not act at this time then even higher taxes would automatically come into play in 2011 -- thus the decision to compromise.

The deal is this:

We now tax estates at the rate of 46 percent for everything over $2 million. However, as of 2011 the estate tax will revert to the old rate: The first $1 million is tax-free but everything over that is taxed at 55 percent.

The difference between the looming 2011 estate tax and the House proposal represents huge savings for big-time estates. How big is a matter of debate.

The Joint Committee on Taxation says the plan would result in tax savings of $280 billion. The Center on Budget and Policy Priorities has a different estimate. It predicts the House bill will generate "$808 billion in lost revenue and $222 billion in increased interest payments on the national debt." That's a total of more than $1 trillion.

The way the tax system works is very simple. The government needs money. If it doesn't get it from Smith it has to get it from Jones. Unless government costs fall, those hundreds of billions of dollars in tax savings for the rich will have to be paid by someone.

Guess who?

• < Prev
• Next >