While Congress continues to debate whether or not to extend the Bush tax cuts, some members of the Senate have reportedly been considering an estate tax hike. The tax expired at the end of last year and is scheduled to return at a rate of 55% in 2011. However, a couple of Congress members are suggesting a new 65% tax.
The Senate Redistribution Caucus—Bernie Sanders (Vermont), Sheldon Whitehouse (Rhode Island), Al Franken (Minnesota), Sherrod Brown (Ohio) and Tom Harkin (Iowa)—are sponsoring the Responsible Death Tax Act to take the federal rate to 65% on large estates. Why stop at two-thirds, guys? Clearly, you think the government has a right to every penny a man makes in a lifetime.
These same five plus Budget Chairman Kent Conrad of North Dakota also want to retroactively apply a death tax to January 1, 2010 on the estates of those who have already died this year. Their revenue grab gives new meaning to the phrase grave robbers. Too bad George Steinbrenner, who died earlier this year and whose family will be able to retain control of the New York Yankees in part because of the lack of an estate tax, can't come back from the dead and shout at these guys.
It's not merely the super-wealthy who will pay these rates unless they shelter their assets in foundations the way that Bill Gates and Warren Buffett have. Estates with as little as $1 million in assets would get hit at the reinstated 55% rate. That $1 million has not been indexed for inflation, so each year more and more middle class families would pay when mom or dad dies. For hundreds of thousands of families, $1 million can easily be the value of the family home, furniture, jewelry, cars, plus a 401(k). All of this would be fair game for IRS confiscation.
The ability to transmit wealth from one generation to the next is a core motivation for Americans to save, reinvest in the family business or accumulate wealth. A 1980 study co-authored by White House economic adviser Larry Summers on savings and capital accumulation in the first three-quarters of the 20th century found exactly that: Americans continue to save even as they get older so they can pass their lifetime legacies on to their kids. But if you can't take it with you, and you can't leave your lifetime earnings to your children or grandchildren, the motivation is to spend down wealth to zero at the time of death.