New York Times op-ed, Protect the Farm, Tax the Manor, by Ray D. Madoff (Boston College):
How do you tell a wealthy heiress from a family farmer? It sounds like the setup for a joke. But in fact it is the fundamental problem underlying sensible reform of the federal estate tax.
Members of Congress are hoping to revise the current law on the estate tax by the end of this year; if they don’t, the estate tax will disappear for a year. Lawmakers should use the opportunity to solve the farmer/heiress riddle once and for all and move our tax system closer to the values on which the country was founded — that hard work should be rewarded and power should not be conferred by birth. …
Proponents of the estate tax, mainly Democrats, argue that we should return to lower exemptions and higher rates so that the wealthy can contribute much-needed dollars to the nation’s recovery.
Opponents, mainly Republicans, argue that there should be no estate tax at all, not just next year but forever, because of the burden on small-business owners.
President Obama has proposed a middle course: blocking the scheduled 2010 repeal but making permanent the $3.5 million exemption and the 45% tax rate we have now. That would mean less revenue from estate taxes over the next 10 years than if Congress did nothing to change the 2001 law — an estimated $233 billion less. Moreover, this approach would leave in place the Achilles’ heel of the estate tax — its potential harm to family farms and small businesses — while providing an unnecessary giveaway to Americans who least need it.
Instead, Congress and the president should forge a different compromise that would respond to the concern for the family farmer and business owner, but still impose appropriate taxes on the wealthy heiresses — and heirs — of America.
What’s needed, to begin with, is a special rule to facilitate the transfer of family farms and small businesses from one generation to the next. … [I]t is appropriate for the estate tax to have a large exemption for family businesses — perhaps as much as $10 million, and indexed to rise with inflation. In order to ensure that this benefit goes to the right taxpayers, the law should require that both the transferring and receiving generations participate in the business or farm for several years and that the enterprise make up a significant portion of the estate. …
Then, we could have a meaningful debate about the appropriate tax for inherited wealth. There is a big difference between wealth acquired through hard work and creativity and wealth bestowed as an accident of birth, and Congress should not be afraid to make this distinction. … American estate tax rates have been as high as 77 percent, so 55% would be reasonable when coupled with a general exemption of $1 million to $2 million.
For too long, the family farm and business issue has served as a distraction, preventing sensible estate tax reform. Congress should get this issue off the table, so that wealthy heirs can contribute their fair share.
For a detailed critique of the op-ed, see here.
