Taxing Death or Making things Right

The Senate dropped an attempt to eliminate the death tax today. The Congress set this one up when they wrote the Bush tax bill and created a series of time bombs including the one on the inheritance tax which repeals it in one year only to have it reinstated in the next. The first attempt was to waive the sunset - failed but I expect the next step will move toward a solution - not full repeal but substantially moving in that direction.

In the Senate vote today - two GOP members voted against the repeal (Voinovich and increasingly dead meat Lincoln Chaffee). But then so did four democrats who made an explicit promise that they would vote to repeal the tax - they were Mark Pryor, Evan Bayh, Ron Wyden and Mary Landrieu. Hopefully, their constituents will listen to them when they come up for reelection again.

The inheritance tax generates only a little bit of money but a lot of rancor. USC Tax Ace Edward McCaffrey comments that "if breaking up large concentrations of wealth is the intention of the death tax, then it is a miserable failure." But while some of the richest in America support continuing the tax, the American people are against it. The rich can modify their behavior so the death tax does not affect them - they can use foundations and other planning instruments that are simply not available to taxpayers with some accumulated wealth but whose estates come from places like businesses they have built up over their lifetime. Of course the life insurance industry has a strong lobby against repeal. But in today's politics common sense does not appeal to many politicians.

Opponents of modifying the tax argue that it prevents the creation of an aristocracy. But that is not at all what it does. For small family businesses and some other assets like those- it forces families to establish schemes to avoid taxes - either though insurance vehicles or other planning mechanisms. The ceiling needs to be raised and the rates on the overall tax needs to be lowered. Afterall, these assets are already taxed once as income. (or gains or dividends).

There is yet hope that the bill will be amended again and an amendment by Senator Kyl will be adopted - the Kyl amendment would significantly raise the ceiling on the tax and lower the effective rates. While that would not protect the broader principle it would forestall this fight for another decade for the vast majority of taxpayers. That may be about all we can expect from this congress.