The Fiscal Cliff: The Death Tax

David Williams

December 13, 2012

As part of the Taxpayer Protection Alliance’s (TPA) closer examination of potential tax increases if Congress and the President don’t avert the fiscal cliff, today’s tax focus is the change in the rate and exemption level of the estate tax.  First, let’s get some semantics out of the way.  The estate tax should be called by its proper name, the Death Tax.  Jim Martin, Chairman of the 60+ Association popularized the term “Death Tax,” because, quite frankly, that is the best way to describe the tax (be sure to check out the great work that the 60+ Association is doing to eliminate the death tax).

Currently the death tax is set at a 35 percent tax rate and applies to estates valued at $5 million or more.  Like other tax rates, the existing tax structure could go by the wayside if Congress’ inaction forces the country over the fiscal cliff.  If we do go over the cliff, estates will face a 55 percent tax rate. Many more of them will face this tax because any estate valued at $1 million and above will be forced to fork over more than half of their hard-earned money, compared to the current exemption of estates valued up to $5 million or more.  It is also important to remember that the money taken from through the estate tax is money that has already been taxed throughout the lifetime of the deceased individual.

A recent CNBC report offered insight into the reason why some in Congress want to see a higher tax rate when it reported that the “tax is needed to prevent family fortunes in American from becoming too large and creating powerful dynasties.”  Since when has earning a profit and providing a comfortable life for your family made you a villain?

Beyond the policy debate, let’s look at the signal this statement – and broadly speaking the death tax – sends.  Government is basically telling every hard-working, self-made man (and his spouse and children) that the money that people struggled so greatly to earn and the sacrifices made were all for naught.  If the government ends up pocketing more of the money than the remaining family members are able to keep, that certainly sends a disincentive for others to innovate and work hard to increase their wealth.

Proponents of the death tax try to say that the death tax only affects millionaires and their trust fund babies.  Nothing could be further from the truth. As The Associated Press recently reported if the current estate tax rate of 35 percent is not extended, “the  number of farm estates subject to the tax will increase 24-fold, and the number of small business estates will increase 10-fold next year, according to a Joint Committee on Taxation estimate.”

The AP article also rightly noted that the death tax will harm farmers as much as any other sector of the economy.  The article noted, “Those changes [death tax rate increase] coupled with the rapid recent run-up in farmland values, could force farmers with even modest acreages to sell part of their land just to pay the taxes, said Trudy Wastweet, the Iowa Farm Bureau’s national policy adviser.”  So not only will the government force family farms to fork over more than half of the value of the property, but in some cases the farmers will actually have to sell their land just to pay the tax bill.

The Senate Republican Policy Committee (RPC) posted a helpful graphic that illustrates just how many family farms will be affected if the current estate tax rate is not extended.  The RPC notes that “Up to 24 percent of America’s farm and ranch families could be forced to hand over a large chunk of their heritage to the Internal Revenue Service when a family member dies.”  Not only will this be economically devastating to the families who are forced to pay the tax, the negative economic impacts will stretch throughout all sectors of our economy.

The death tax is an awful policy that further complicates our already complicated tax code.  While the current rate and scope of the death tax is bad, the potential one that could hit January 1, 2013 is much worse.   And, according to Jim Martin with the 60+ Association, “The death tax is a bad tax, plain and simple, far worse than most.  It kills jobs, it strangles prosperity, it destroys opportunity, and it raises little revenue for the Treasury despite the fact it has a disparate impact on minority-owned farms and businesses.  Letting the government have the power to devour more than half of a person’s lifetime achievement in the form of taxes on top of the taxes already taken, it goes against everything this country should stand for.”

The current tax rate and exemption level should be eliminated, but in the absence of that, Congress needs to make sure that more money isn’t siphoned from people from beyond the grave by allowing the rate to increase.