By By Tray Smith
I am no fan of the federal income tax system and I have long supported overhauling it and replacing it with a simple Fair Tax (a progressive national retail sales tax.) However, with President Bush's approval rating hovering in the high 30's and Congressional Republicans scared to pass any major pieces of legislation before this November's midterm elections, I do not see any major reforms of our tax laws on the horizon. But the U.S. Congress could start moving in the right direction by eliminating the death tax, perhaps the worst element of our current tax code.
It has been said that the only thing certain in life is death and taxes, but in the United States, it is also certain that taxes will remain on your wealth after you die. For those of you who are not familiar with the death tax, it is a levy imposed on those who inherit an estate based on the total value of the estate inherited. In 2006, the tax imposed a 45% marginal rate on an estate for each dollar it is worth over $2 million. The tax does not normally affect the transfer of an estate to the spouse of a deceased person, but instead takes effect after both spouses die and the estate is passed on to their children. For example, if a two-parent family were to leave their two children an estate of $3 million, then the first $2 million would be deductible and the children would pay 45% of the remaining $1 million for a total tax burden of $450,000 that would be shared between them. It is important to emphasize that by estate, all business and property value is included. Therefore, if a small business's value significantly outweighs a family's cash assets, the person inheriting an estate may be forced to sale the business.
Currently, the death tax will be phased out by 2010, but it will be reinstated in 2011. As an example of how ridiculous our current tax laws are, the death tax will not have an impact on people if their parents die in 2010, but it will tax them if their parents die in 2009 or 2011. (Now the government is giving people a financial incentive to drop dead in 2010, "Hey Mom, could you hurry up and croak this year so that I don't have to pay the death tax?") Republicans have supported ending this lunacy by permanently eliminating the death tax, but Democrats, adhering to their principle of punishing people for making money, led a filibuster to block that proposal from coming to a vote in the Senate early last month.
I do not believe it is fair to expect someone to pay taxes on what they earn their entire life and then impose another tax burden on their children after they die. While I probably will not ever be left enough money to reach the estate tax threshold, I sympathize with children, especially young ones who have not yet had the opportunity to accumulate wealth, who are forced to sell off their family business because they cannot afford the burden of the death tax. The death tax also discourages entrepreneurs from investing in a business after it reaches the death tax threshold because of the fact that their investment will be taxed by almost 50% after they die. That prevents increased investment in our economy that would create wealth and jobs.
Though supporters of the tax argue that eliminating it will be a huge benefit to the rich, they do not consider small business owners and farmer's whose assets are mostly in property. As well, the death tax makes up less than 1.1% of all federal revenue, so it is not a huge benefit to anyone. Finally, suggesting that people should be asked to pay taxes on the same earnings twice or possibly even three times is not fair no matter how wealthy they are. While repealing the tax will increase the deficit in the short term, the effects will not be extremely large because the death tax is already being gradually phased out. As well, the long term gains of increased economic activity based on the free market instead of federal tax policy will help the nation economically and the government fiscally.
The House recently passed a compromise bill that would lower the death tax rates and increase the threshold. Though it falls far short of complete repeal, it is a step in the right direction. It remains uncertain whether or not the bill will pass the Senate. However, whether the Senate acts or not, it is time for the death tax to die.
That is the bottom line.
Tray Smith is a political columnist for the Atmore Advance. He can be reached for contact at tsmith_90@hotmail.com. His column appears weekly.