Death Tax:
The death tax – or estate tax – has been cut for 2004, as part of a multi-year legislated phase out of this unfair, counter-productive levy. This year, the exemption amount increased from $1 million to $1.5 million, and the top tax rate declined from 49% to 48%. Before the 2001 tax cut was passed, the top rate was 55%, and the exemption level $675,000.
Under the current legislation, the exemption is set to increase to $2 million in 2006 and $3.5 million in 2009. The top death tax rate is to fall to 47% in 2005, 46% in 2006, and 45% in 2007. Then, in 2010, the tax is eliminated altogether.
That’s the good news.
The bad news, of course, is that the tax cut sunsets in 2011. So, the death tax would return that year with an exemption level of $1 million, and a top rate of 55%.
The estate tax is a grossly inefficient tax. Since this is a tax on assets, incentives for investing and risk taking are diminished. Many family-owned businesses simply cannot survive the death tax, and either must be sold or their doors closed. Resources are lost on tax planning and avoidance measures. In addition, the current uncertainty about the tax’s future fosters waste and restrains economic activity.
Fortunately, President George W. Bush in his State of the Union speech on January 20, 2004, called on Congress to make the tax cuts passed in recent years permanent. At one point, he said to Congress: “Unless you act, small businesses will pay higher taxes. Unless you act, the death tax will eventually come back to life. Unless you act, Americans face a tax increase.”
Meanwhile, none of the Democrats seeking the White House this year support the complete repeal of the death tax.
At the very least, the elimination of the death tax scheduled to occur in 2010 should be made permanent. Far more productive would be the immediate, permanent elimination of the death tax, which would be a plus for investing, job growth and the economy.
Raymond J. Keating
Chief Economist
Small Business Survival Committee
