Monday, September 27, 2004

Tax Breaks

Estate-tax loss will punch hole in budget

By 2010, money for survivors won't be taxed, saving billions for farmers, the nation's richest

By Melvin Claxton and Ronald J. Hansen / The Detroit News

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At a time when the Bush administration is pinching pennies with federal programs for the poor, it has turned its back on $13 billion.

The 2001 Bush administration tax cut package is gradually eliminating the estate tax. The tax currently applies to estates with assets of more than $1.2 million.

It is a tax paid only by the richest 2 percent of Americans upon their deaths.

Even then, their full assets are not taxed. They only pay taxes on the amount above the $1.2 million cutoff.

Under the Bush plan, the estate tax rate will drop from 55 percent to 45 percent by 2007.

And starting in 2009, only estates valued at more than $3.5 million will be taxed.

Under the Bush cuts, the estate tax ends in 2010, but returns the next year to the 2000 level. The administration wants to repeal the estate tax permanently.

In 2009, the government will lose an estimated $23 billion. When the tax disappears completely, it is expected the government will lose $53 billion, according to estimates by the Center on Budget and Policy Priorities, using data from the congressional Joint Committee on Taxation.

Bush claimed the tax cut was needed in part to protect heirs of family farmers who would be forced to sell inherited property to cover the estate taxes. But the law already gave these heirs 14 years to pay the taxes.

Instituted in 1916, the tax was modified a year later to help finance World War I. The estate tax has always been reserved for those with the most cash, investments, businesses and other forms of wealth at the time of their death.

Some of these assets were not taxed while their millionaire owner was alive.

In fact, for estates worth more than $10 million, 56 percent of the estate was unearned income that had never been taxed at all, the Brookings Institution found in a 2001 report.

Because of the estate tax’s high rate, the government wrote myriad exceptions into law, allowing the rich to significantly reduce the value of their taxable estates.

Wal-Mart founder Sam Walton, considered the richest man in America in the 1980s, passed on $23 billion and control of his retail empire before his death in April 1992. Today, his wife and four children are worth more than $20 billion each.

The cost to society, however, is even larger.

One way that the nation’s wealthiest are able to lower their exposure to the estate tax is by making charitable donations, which are 100 percent deductible for them in the first place.

In 2001, the latest year for which figures are available, the nation’s richest citizens donated $16 billion to charities upon their deaths, according to the Brookings report. At least $5 billion more was donated to charity in 2001 by the extremely rich while they were still living.

Without the estate tax, many of these people would have fewer reasons to give away any portion of their wealth.

This summer, the nonpartisan Congressional Budget Office estimated that charitable donations would drop at least 6 percent without the estate tax and that charitable bequests would drop at least 20 percent. This means charities would lose at least $12 billion annually, the CBO predicted.

And the costs keep rising.

The Joint Committee on Taxation estimates that the estate tax repeal will deny the government $162 billion by 2013. That means the government must seek the money from other, less wealthy sources, add to the national debt or cut services.

In fact, revenue from the estate tax alone could nearly cover the cost of offering subsidized child care to every low-income family in America.