Showdown Over Bush Cuts Revives Estate Tax Fight

Part of a series on tax policy.

The estate tax typically hits a tiny fraction of the wealthiest Americans, but it often generates debate among a much larger segment of the population. And this year could be no exception, though it's the first and probably only year there are no federal estate taxes on the books.

That means a potentially huge windfall for the heirs to the George Steinbrenner estate, reportedly worth more than $1 billion. If Congress does not try to collect a retroactive estate tax this year, it means his heirs won't have to pay the 45 percent tax on everything over $3.5 million that would have applied last year.

This quirk in the tax code is the result of the Bush tax cuts, which started phasing out estate taxes a decade ago. Next year, if Congress does nothing, the taxes will go back up to their pre-2001 levels.

The Estate Tax

Under President George W. Bush, Congress gradually increased the amount exempted from the estate tax and reduced the top estate tax rate. The estate tax was repealed for 2010 but is scheduled to reset at pre-2001 levels.

Year Exemption Top Tax Rate
2001 $675,000 60%
2002 1,000,000 50
2003 1,000,000 49
2004 1,500,000 48
2005 1,500,000 47
2006 2,000,000 46
2007 2,000,000 45
2008 2,000,000 45
2009 3,500,000 45
2010 Repealed -
2011 1,000,000 60

And that has reignited debate over whether — or how big — estate taxes should be.

Estate taxes affect a small segment of the wealthiest Americans. Last year, only a quarter of a percent of those who died paid any.

Abigail Disney benefited greatly from a big inheritance but believes the estate tax should come back, at least to their levels last year.

"I take this position because I love my country," says Disney, the granddaughter of Roy Disney, who helped build the Walt Disney Co. empire. "And the fact is, my grandfather could never have built his business anywhere else."

Disney, a filmmaker and philanthropist, spent a lot of time shooting a film in Liberia. She says there, unlike the United States, there are no safe roads or schools and therefore no safe investments. And she says those who make money in a secure society like the U.S. also owe the society a debt.

She joined a group of wealthy individuals called United for a Fair Economy in part, she says, because she felt wealth is fundamentally unfair.

"It's absolutely an accident of my birth. And that's sort of the point — that there shouldn't be dynasties built around the simple good luck of being born related to somebody very wealthy," she says.

Warren Buffett and Robert Rubin are also members of the group and share the same philosophy. But not even Disney's family agrees with her. And she and her sympathizers face a mountain of money lobbying on the other side, including from the Chamber of Commerce and the National Federation of Independent Businesses.

In a nutshell, opponents argue that bringing back the estate tax — or, as they prefer to call it, the "death tax" — will be hurtful mostly to small businesses like Alarm Detection Systems.

Bob Bonifas started his company 42 years ago. He says he has spent three decades and paid lots of accountants to plan so that his children can continue to run his $33-million-a-year security business after he passes away.

"I think I've planned enough that it would probably survive, but it would still have to [take] a major loan," he says. "Maybe $10 million or something. Those are big numbers if you've already got $10 million worth of debt."

Opponents of the estate tax say it threatens lots of small businesses because heirs have to sell parts of the business in order to pay the tax. In reality, nonpartisan experts say, there are few examples where that is the result. More often, estate tax planning sucks up lots of time and money for small businesses.

In Bonifas' case, that means he's been moving money into trust funds and gifts to his children and grandchildren. But he says doing so is an unfair burden to him. He thinks there should be no estate tax, since he pays income taxes and the business pays various other taxes.

"I've already paid taxes on this money," he says. "I mean, why would you penalize somebody for dying?"

Roberton Williams is a fellow at the nonpartisan Tax Policy Center. He says last year the estate tax hit the fewest number of people in the history of the tax. But the tax also creates a huge incentive for the wealthy to give to charities.

Without any estate tax, Williams says, charitable giving could fall by up to a third.

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