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Monday, September 21, 2009

Death Tax Reminder

The September 19 Wall Street Journal provided a reminder that action on the estate tax -- more aptly, the death tax -- looms.

The Journal noted:

President George W. Bush's 10-year, $1.35 trillion across-the-board tax cut, passed in 2001, included a slow-but-steady reduction of the levy on heirs that critics branded "the death tax." Under the law, the value of an inheritance shielded from taxation increased from $1 million to $3.5 million in 2009. The tax rate on inheritances larger than that slowly decreased from 55% to 45%. Then, in 2010, the entire estate levy was to disappear.

But it is scheduled to come back in full, pre-Bush force in 2011 -- a 55% rate on the portion of estates over $1 million -- when the entire 2001 tax cut expires. That was a compromise accepted by tax-writers to limit the long-term cost to the government of the tax cuts for budget scorekeeping purposes. But many policy makers assumed at the time that Congress in 2010 would instead vote to lock the full tax cuts in place permanently.

So much for that assumption.

Now, the White House and Congress are trying to figure out how to keep the tax around. President Obama wants a death tax with a $3.5 million exclusion and a top rate of 45%. Senate Finance Committee Chairman Max Baucus (D-MT) wants to index the exclusion level for inflation. Meanwhile, Republicans Jon Kyl (AZ) is looking for a 35% rate, and a $5 million exclusion.

What’s the policy that makes the most sense for the economy? Obviously, it would be killing this tax that is rooted in envy, discourages investment, and diverts resources from the private sector to government. And if it is allowed to die at the end of this year, will the President and leaders in Congress be willing to bring a tax back from the death?

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

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