In a Friday editorial, the Wall Street Journal sketched an acceptable estate tax compromise as total repeal becomes increasingly unlikely politically:
- 15% top rate (inflation-adjusted)
- $10 million exclusion (inflation-adjusted)
- Continued basis step-up under § 1014
4 responses to “Wall Street Journal Broaches Estate Tax Compromise”
Has there been a calculation of the revenue losses from this proposal? The 15% rate is too low. The exclusion amount perhaps a little too high. Retention of the step-up in basis would be the gravy under this proposal; in fact this may be the primary goal of WSJ interests – pass on appreciated assets that the beneficiaries can then sell with few income tax consequences and keep the wealth in the family. As I recall Democrats had proposed an increase in the exemption to $5 million, subject to increase, but leaving the rates alone and retaining the step-up.
Shag: the revenue loss from this proposal is a lot lower than from complete repeal, which is what the administration is asking for. Word around here is that there are Republican majorities in both the House and the Senate and the Democrats don’t have a real strong negotiating position.
This whole process should be a lesson to somebody, I am not sure whom. If the estate tax proponents had responded to the first calls for repeal with lower rates, they propably would have defelected the whole thing into a more productive discussion than what they got.
Instead they channeled the discussion into social justice “the primary goal of WSJ interests . . . keep the wealth in the family” and managed only to irritate people.
The most agravating thing about the estate tax has been its rates. Until recently the top marginal rate, with the mysterious low rate clawback, has been 60%. That is very high. Much higher than any of the income tax rates have been since the 1980s.
Combine that rate with the unified credit structure (the credit is applied to the first dollar) and you have a tremendous incentive to plan, using fairly sophisticated devices, even for relatively small estates.
Of course the truth is that the tax cannot withstand planning, which is why there are Rockefellers, DuPonts and Kennedys even after nearly a century of the estate tax.
If the proponents want to lay a track out of the swamp, the WSJ has offered them a shovel.
15% is low, but it is not irrationally low. It is the same order of magnitude as the Capital Gains tax. If it is imposed, the case for step up is pretty tight. OTOH, The proponents could argue that the rate should match the top rate on the income tax, which is now 35% and I think is scheduled to be 33%.
Another point of reference is the gift tax. Under the current repeal proposal, the gift tax would be left in place with a top rate of, IIRC, 35%. As I recall the IRS talked the Congress into doing that on the grounds that repeal of the gift tax would leave too many doors open for gaming the income tax system.
A 35% gift tax rate charged to the donor on an add on basis is equivalent to a 26% estate tax. 33% gift tax = 23% estate tax.
I think a $10 Million credit is too large for a 15% tax. It would beg to be used in a planning exercise immeadiately and would be a red flag for rate raising.
Furthermore. I would like to see the gift and estate taxes de-unified (separated in english) and the credit turned into a deduction/exemption. If the rates are reduced to the vicinity I am discussing (15 to 26%) I think a $1 million exemption is more than adequate. A $130,000 tax on a $2 million estate will not result in the sale of many family farms.
In a separate gift tax I would like to see graduated rates with large steps, a large annual deduction exemption for simple gifts dependendent on reporting, with the idea of encouraging taxable gifts. I think the social good is spreading it around rather than tying it up in trusts.
Robert Schwartz: Well done and very informative.
As to “tying it up in trusts”, I made an effort several years ago through my Congressman (Barney Frank) to amend the Code by providing the concept of the “carryover” for the portion of the exemption of the spouse first to die that is unused, to the surviving spouse. This could provide many couples with “I love you” estate plans without the need for complicated and complicating trusts. I was informed that this idea had been previously considered and thought to result in significant revenue losses. Now, planners might not like this simplicity but I do love my wife and would rather pass on all to her as I trust her and her interest in eventually providing for our children (now adults) without encumbering her with trusts, attorneys, accountants, etc. Of course, for this to work, the unlimited marital deduction would have to stay in place. This is not to suggest that the use of trusts is not appropriate in some instances.
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