Estate tax fears loom as inauguration nears

The following excerpts are from Estates of Pain — The first tax increase of the Obama era, Wall St. J., Jan. 12, 2009:

Mark it down as the first tax increase of the new Democratic era. The Journal reported yesterday that President-elect Obama and Congressional leaders intend to maintain the estate tax rather than let it expire on schedule in 2010.

They will do so even though their economic stimulus plan is supposed to be about creating millions of new jobs in a hurry. The death tax strikes most heavily at small- and medium-sized family-owned businesses that generate the majority of new American jobs. So hitting these family businesses with a multimillion dollar tax bill when the owner dies won’t help job creation.

Republicans are partly to blame here for making this easy for Democrats, thanks to their mistakes in the 2001 tax bill. Rather than repeal the tax immediately, Republicans got bamboozled into agreeing to a 10-year phase-out that eliminates the tax only for a single year. Then the rate goes all the way back in 2011 to the confiscatory 55% rate of the Clinton era, with a mere $1 million exclusion. Republicans never did fix the tax revenue estimating process on Capitol Hill, and this is one price for that failure.

Mr. Obama wants to make the current death tax rate of 45% permanent, along with an exclusion of $3.5 million ($7 million for couples). One issue to watch is whether this exclusion is indexed for inflation, or else over time it will hit more and more average earners who build up a small nest egg over a lifetime. * * *

According to the American Council for Capital Formation, the U.S. has the third highest estate tax in the developed world — 49% if you add the federal rate and average state rate, just below 50% in Japan and South Korea.

Special thanks to Patrick S. Sylvester (Attorney & Counselor at Law, Sylvester Law Firm, PC) for bringing this article to my attention.