In the 1970 film Little Big Man, Dustin Hoffman’s Jack Crabb recalls his life among the Indians in the days of General George Custer, and the ageless wisdom of his grandfather, Old Lodge Skins.
Feeling his age, Old Lodge Skins decides to take matters into his own hands, commanding the spirits to take his life. “Today is a good day to die,” he tells young Jack. He falls to the ground. But after a few moments, he opens his eyes and props himself up.
Am I still in this world?” he asks his grandson.
“Yes, grandfather,” Jack replies.
“I was afraid of that,” Old Lodge Skins groans. “Well, sometimes the magic works. Sometimes, it doesn’t.”
The scene comes to mind because 2010 will be a good year to die — taxwise, that is. Under current federal law, the estate tax will be repealed in full, but for one year only. Unless Congress steps in, the law will revert to its pre-2001 level in 2011.
Back in 2001, only the first $1 million of an estate was exempt and the tax rate was 55 percent on anything over that. President Bush started on the road to the tax’s 2010 phase-out through the passage of his massive tax cut bill, which gradually increased the estate tax exemption and lowered the tax rate.
This year, individuals with estates of $3.5 million or less are exempt from the 45 percent tax, and married couples can seek a combined exemption of $7 million, depending on how their marital assets are titled.
The idea, when Bush’s phase-out was proposed, was to force Congress to act on the issue this year. Well, that time is drawing near, and opponents of the tax are counting on a little of that old magic to make sure the estate tax stays buried after its 2010 repeal.
Surprisingly, given the precarious state of the economy and the burdens it is imposing on rich and poor, not much has been heard about the estate tax. But rest assured, efforts are still underway in Congress to repeal the tax once and for all.
“Some are calling for complete repeal of the estate tax,” said Rep. Nydia Velazquez, D-N.Y., who chairs the House Committee on Small Business. “Others have suggested that Congress freeze estate tax provisions in their 2010 form. One thing is clear: we will need to find a solution.”
Velazquez’s comments came during a hearing before the House Small Business Committee, where opponents, who derisively call the levy the “death tax,” urged its full repeal.
“Death should not be a taxable event,” said Rep. Sam Graves, R-Mo. “The notion that the federal government is owed anything upon the death of a family member is outrageous to me.”
The current estate tax was enacted benignly enough in 1916 to help pay for World War I and was supposed to be temporary. The initial top rate was just 10 percent. But the tax has been on the books ever since.
Ironically, it became truer to its historical purpose — to prevent the rise of an entrenched monied class — during the Great Depression. Under President Roosevelt’s Revenue Act of 1935, the top tax rate was increased to 60 percent from 45 percent and a year later it increased again to 70 percent.
But Terry Neese, a Distinguished Fellow at the National Center for Policy Analysis, a Washington think tank, testified that the notion of a monied class in the United States, akin to royalty in Europe, is one of the myths surrounding the tax.
“It is commonly assumed that inheritances are a major source of wealth inequality and that the offspring of wealthy families tend to be as rich as their parents due to bequests,” she said.
Among the wealthiest 1 percent of Americans only 17 percent of their wealth came from bequests, she said, citing an NCPA analysis of data from its survey of consumer finances.
While it’s true that about 23 percent of the nation’s wealth is concentrated in 1 percent of all households, taxing away every dollar inherited would only reduce their share of national wealth by 4 percentage points, Neese said.
If the same formula were applied to the top 5 percent of all households, which controls 51 percent of the nation’s wealth, it would reduce their share by only 7 percentage points.
“Wealth is highly mobile; being raised in a wealthy family does not guarantee that these children will be rich themselves when they retire. Only one in five children of the wealthy will themselves be wealthy when they reach retirement age,” she said.
While advocates claim the estate tax raises considerable sums for the federal government, it provides less than 3 percent of Uncle Sam’s yearly tax bounty. At the same time, it reduces capital formation, which leads to lower productivity, wages, and federal payroll and income taxes, Neese said.
In fact, a recent study by the conservative Heritage Foundation found that repealing the tax would boost the economy by as much as $11 billion per year in extra output.
But a separate study by the Center on Budget Policy and Priorities, another Washington-based think tank, uses some of the same arguments to advocate in favor of the tax.
It asserts that almost no small businesses or farm estates would owe any estate tax under the law’s current 2009 structure.
Based on the organization’s analysis, fewer than 0.2 percent of all estates — two of every 1,000 — will be subject to tax in 2009. Of the estates that are taxable, only about 1.3 percent are small businesses or farms that are valued at up to $5 million and make up the majority of the estate.
The upshot is that only three out of every 100,000 people who die in 2009 will own a small business or farm that is subject to any estate tax, according to the study.
But try telling that to Christy Spoa, Sr., who owns Save-a-Lot, a grocery store chain in Ellwood City, Pa., that’s been in his family for 91 years. Three of his four children work with him, and he hopes they will take over when he retires.
Like many small businesses, however, Spoa says his company is asset-rich in terms of plant, equipment, and machinery, but cash poor. To help pay the estate tax in the event of his death, he carries a large insurance policy.
“I can only imagine how painful it must be to be faced with having to sell off all or part of a once-thriving family business in order to pay the tax,” he said.