Paul L. Caron
Dean





Sunday, November 7, 2010

Thaler: Estate Tax Offers Quick Test for Congress

New York Times op-ed, Estate Tax Issue Offers Quick Test for Congress, by Richard H. Thaler (University of Chicago, Booth School of Business):

Consider three courses that Congress might take:

  • Do nothing and go back to the 2001 exemption and rates.
  • Make the 2009 rates and exemption permanent, an approach that the Obama administration favors.
  • Make the 2010 rules permanent, thereby eliminating the estate tax, as the Republican leadership would like to do. ...

What should Congress do? The most important step would be to end the uncertainty by legislating a permanent set of rules. If Congress doesn’t act, even middle-class households might soon be facing an estate tax. And of all the taxes in our system, the estate tax probably requires the most advance thought. (It is called “estate tax planning,” after all.) To avoid future showdowns in Congress, the exemption should be indexed for inflation if the estate tax remains.

But what about the tax rate? The proposed 45% rate is the lowest since 1932, but it still sounds high, almost confiscatory. Yet we must keep that $7 million exemption in mind. The Tax Policy Center estimates that in 2009, the average effective rate (taxes paid as a proportion of the entire estate) was 19.4% for all taxable estates. Even for estates above $20 million, the rate was only 22.4%.

We could lower the rate if we also lowered the exemption, but that would be a mistake. Dealing with the estate tax is a major nuisance, so it should apply to as few people as possible. With the $7 million exemption, only 3 estates in 1,000 would have to pay any tax. And those with estates that big could certainly afford a good lawyer to help them further increase the effective size of their exemption.

One might think that eliminating the tax — that is, continuing the 2010 rules — would end this reporting burden for everyone. In fact, the opposite is true. There are new filing provisions in 2010 for any estate with more than $1.3 million in unrealized capital gains. Previously, the original prices for assets in an estate weren’t important because the income tax bases were “stepped up” to current levels. Now, the IRS wants to know the original purchase prices, which you will have to enter on a form that the agency has not yet provided. ...

So let’s be serious. There are lots of ways to spend $250 billion. Trim the deficit, improve education, support the troops, or make sure heiresses like Paris Hilton have the proper attire for trips to St.-Tropez. At this time in our history, which of them seem prudent?

https://taxprof.typepad.com/taxprof_blog/2010/11/estate-tax.html

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