An Antidote to Estate Tax Misinformation

Sam Pizzigati

Another billionaire has bit the dust here in 2010, and another grand fortune, thanks to this year’s absence of an estate tax, is passing on tax-free to extremely fortunate heirs. But a new resource may help overcome the lies and half-truths that have the estate tax reeling.

Forbes magazine will next week unveil its latest annual listing of America’s 400 richest. Missing from the list this year, for the first time in decades, will be John Kluge, the billionaire media king. Kluge died last week at the age of 95.  

Twenty years ago, Kluge topped the Forbes list, with a fortune then worth over $5 billion. Kluge later would acknowledge that he had been rather lucky in life. Not as lucky as his heirs. This year marks America’s first since 1916 without an estate tax. Kluge’s heirs get to inherit his fortune totally tax-free.

Human societies have been levying taxes on the wealth the wealthy leave behind — at death — ever since pharaohs called the shots in ancient Egypt. That makes this year’s inheritance situation, here in the United States, a rather freaky event. Billionaires who pass away this calendar year can legally leave behind billions of dollars, untaxed, to their heirs. This “free pass” to rich relations will expire at year’s end, and that prospect has lawmakers in Congress in somewhat of a tizzy. Conservatives want the free pass extended. Everyone else wants some sort of estate tax to come back into effect.

Conservatives don’t have the votes to make the free pass — a relic of cutesy tax cut games the Bush White House played back in 2001 — permanent. Everyone else can’t agree on how rough on the rich a new federal estate tax ought to be.

Into this paralyzed debate now comes David Joulfaian, a U.S. Department of the Treasury tax analyst who has just compiled an indispensable reference guide to almost everything estate tax related.

Joulfaian’s new paper, available online, offers a remarkably wide array of insights and information. Some of his facts speak directly to the estate tax debates now unfolding in the halls of Congress. Others just make for interesting reading.

Did you know, for instance, that wealthy Americans bequeath more of their fortunes to nieces and nephews than siblings and more to parents, aunts, and uncles than nieces and nephews?

Most Americans actually know precious little about the estate tax, and most of that little often happens to be wrong. But that’s understandable. A band of America’s ultra-rich have spent a fortune the last two decades trying to scare Americans into repealing the estate tax.

These scare tactics haven’t yet permanently ended the estate tax levy. But they have convinced millions of average Americans that a “death tax” threatens to erase their life savings. David Joulfaian, in his new paper, supplies the core data that neatly explode this malicious misinformation — and all the other factual falsehoods estate-tax repealers have been so relentlessly propounding.

Joulfaian’s paper, for instance, invites us to consider the 2.4 million Americans who died in 2004. Only 42,239 of them left behind an estate large enough to require the filing of an estate tax return. And of the 42,239 estate tax returns filed, only 19,294 ended up with any estate tax due.

Why so few? U.S. estate tax law has historically extended an assortment of exemptions and deductions. The biggest: Affluent spouses can leave wealth tax-free to their surviving spouses. Most all do. Other special estate tax considerations go to small businesspeople and family farmers.

Estate tax foes love to claim that estate taxation forces small business heirs to sell their family businesses to pay the estate tax due. In reality, as Joulfaian details, small businesspeople face no such dire straits, mainly because estate tax law lets them claim extra exemptions and value their assets at a discount.

On top of that, small business and family farm heirs get 14 years to pay any estate tax that might be due, a big reason why estate tax critics have never been able to trot out any flesh-and-blood small business estate tax “victims.”

What about big businesspeople? The estate tax repeal crowd also loves to claim that the truly rich don’t pay estate taxes. Their lawyers and tax accountants, the argument goes, routinely end run the tax code.

Lawyers and tax accountants do make fortunes, of course, guiding the super rich through the tax code thickets. But the rich, even after all this guiding, still do pay substantial amounts in estate tax.

signupThe biggest estates left behind in 2004 — estates worth over $20 million — paid, on average, an estate tax that equaled 46.1 percent of the estate net worth, after subtracting from net worth funeral and other estate expenses, bequests to the surviving spouse, and charitable contributions.

In all, the non-spouse heirs of 2004’s super rich ended up receiving only 21.5 percent of their sugar-daddy’s (or mommy’s) net worth.

President Theodore Roosevelt had that sort of outcome in mind back in 1906 when he first proposed a progressive estate tax for the United States. An estate tax, he believed, ought to be “framed so as to put it out of the power of the owner of one of these enormous fortunes to hand on more than a certain amount to any one individual.”

Our fortunes today run every bit as large as the fortunes that frightened TR. His America needed a rigorous estate tax. So does ours.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up to receive Too Much in your email inbox.

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