The Estate Tax Explained: Who It Hits And Doesn't

A philosophical question arose on the floor of the House of Representatives on Thursday: Should dead people have to pay taxes? Sounds funny, but the estate tax or, as Republicans call it, the "death tax," is one of the big debates between the two parties. And, as is usually the case, the truth is more complicated than either party makes it.

According to Ben Harris, a researcher with the Tax Policy Center whose job is to pore over IRS statistics and tax tables, "very, very, very few people" pay estate taxes.

"It hits about 2 out of every 1,000 estates, and these estates are the wealthiest of the wealthy," he says. "These are very high-income individuals who are affected by the estate tax."

The Tax Policy Center is a think tank that is a joint project of the Urban Institute and the Brookings Institution. It's been tracking the inheritance tax since President George W. Bush and his Republican Congress tried to kill it by putting the tax on a long slide into the ground. Over the past decade, the tax rate got progressively lower, while the amount of money a person had to be worth to pay it got higher. The idea was that by 2010 — poof! —there would be no more estate tax at all.

On the House floor Thursday, Texas Republican Louie Gohmert reminded lawmakers why his party wants to kill the estate tax. It's a moral issue, he said.

"After someone dies, and someone comes in and steals from them, we consider that reprehensible, that's just despicable," he said. "But when the government comes in — because we have the power to pass laws and legalize theft — it's OK."

But here's the catch: When Republicans wrote their law, to just end the estate tax would have cost too much. So they made their law temporary: 10 years of lower rates, and after that, it would snap back to 2001 levels. Their bet was that some future administration would fully repeal the tax beforehand.

It was a bad bet.

The past three years have seen a historic turnaround politically. Democrats took over Congress and the White House. And they, too, see estate taxes as a moral issue — just from the other side.

"Without the estate tax, you in effect will have an aristocracy of the wealthy, which means you pass down the ability to command the resources of the nation based on heredity rather than merit," Democrat Jared Polis of Colorado said, quoting billionaire Warren Buffett. "America is and should be a meritocracy."

Then again, almost no one — including Democrats — wants to go back to the higher, 2001 rates. Those rates would affect more modest estates — those worth $1 million and up — which include a lot of small farms and businesses.

So Democrats brought to the House floor something of a compromise: a permanent estate tax at this year's levels. That means that if a couple's estate is worth more than $7 million or an individual leaves behind more than $3.5 million, the money over that threshold is subject to a 45 percent tax.

The tax policy institute estimates that will affect about 6,000 estates this year — of which about 100 are small businesses or farms.

Debate on the House floor sounded contentious. (The prize for best quip goes to the Republicans who came up with "No Taxation Without Respiration.") But in the end, what passed was the essence of compromise. Republicans won the lowest estate tax rates in a decade, while Democrats can count on the $500 billion it will raise over the next decade.

Now, on to the Senate.

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