Washington – To steal a line from Mark Twain, the death of the death tax has been greatly exaggerated.
In a brazen con job, members of the House of Representatives are crowing that they “killed the death tax” by voting to abolish the federal estate tax.
If the Senate concurs, citizens might reasonably conclude that they will have to pay no – as in zero – taxes on any future inheritance.
But things are rarely as they seem in the fun house on the Potomac. If the members of Congress actually eliminated the tax, they would be forced to cut spending, or run up more debt.
And so they devised a way to “kill the death tax” and still keep taking your family’s money.
The estate tax has been around for a long time – almost a century. For many years, nobody thought it particularly unfair. There were ways to get around it, like giving to charity, which did some good. And nine out of 10 Americans were exempt, since the tax only applied to estates of a certain size.
Yet for some farmers and ranchers and family-run businesses, the estate tax was a big deal. It began to take a bite out of more and more folks as economic growth and inflation nudged up the value of stocks, homes and other real estate.
Family-owned farms and ranches and businesses are great things. So is saving for your children. Entrepreneurs are justly praised in our culture, and should not be unfairly penalized.
I’ve had wonderful jobs at terrific newspapers, but I’ve never been happier than when working for myself. Being your own boss, making something from a notion, is character-building. And there was always the hope that Steven Spielberg would knock on my door, buy a story, and move me up to Easy Street.
It didn’t happen, and I slunk back to working for the man. But I was sympathetic when Congress raised the exemption on the estate tax, until it now applies to just 1 percent or 2 percent of the American population each year. You can pass on $1.5 million in assets to your heirs without their having to pay the tax, and that exemption is scheduled to climb over time to $3.5 million a person in 2009. That would exempt 99 percent of Americans. You would think that is enough.
In the past few years, however, the estate tax has become a target of anti-tax ideologues and conservative eggheads who insist that capital must never, ever, be taxed twice.
According to them, we can’t better guard our borders, build highways, educate kids, balance the budget or let some disabled person have a few more bucks in their Social Security check when an abstract economic principle is at stake. No sir.
Naturally, this being Washington, the ideologues were supported by a few very wealthy families that had made a fortune peddling alcohol, candy and other products. They hired the cream of the capital’s lobbying corps and salted congressional campaign treasuries with big donations.
Soon, nothing less than full repeal of the odious estate tax would suffice. And so the House voted to “kill” the tax, with great flourish, on the eve of federal tax day.
The House might have taken this symbolic stroke on April 15 itself, except that tax day fell on a Friday this year and our representatives don’t generally work on Fridays. Or Mondays. Or much of Tuesdays or Thursdays.
So what’s the catch?
If you have lost a loved one recently, you know the IRS doesn’t levy a federal capital- gains tax when you dispose of Grandpa’s assets.
If Grandpa bought some stock in General Electric at $2 a share many years ago, and he sold it at $70 a share while he was alive, he would have to pay a whopping tax on the $68 gain.
But if Grandpa left the stock to you in his will, you inherit the stock at $70, and don’t have to pay the capital-gains tax. Your family has made a tax-free profit of $68 a share.
When “killing” the estate tax, the House voted to change all that. A capital-gains tax on that $68 will now be collected from thousands of middle- to upper-middle income folks, like farmers and small-businessmen, who thought relief was on the way.
For those of you who have studied bookkeeping, I’m told this is known as a change from a “step-up” to a “carry-over” basis.
Why did the House do this? Even with a $3.5 million exemption, the estate tax brings in so much money that politicians tremble at having to cut spending, or add to the massive federal debt, to replace the lost revenue. A complete repeal would cost the government $400 billion over the next decade.
So a few rich families will handsomely profit from “repeal,” but many ranchers and farmers and small-business owners – the very people this was supposed to help – will now have to pay taxes on Grandpa’s capital gains.
Not to mention the hours they will spend trying to figure out just when Grandpa bought that GE stock, and his other stocks and bonds, real estate or farm equipment, and what he paid for them years ago.
“Proponents of repeal tout the benefits of estate-tax repeal to the small-business owner when, in fact, repeal will actually harm most small-business owners because of the loss in the step-up basis,” said the Small Business Council of America.
And all of us, of course, will need to pick up the burden that’s been lifted from the richest Americans. We’ll be paying more interest on a bigger federal debt, or paying higher taxes on something else, or maybe watching Social Security or Medicare get cut.
Maybe Sens. Wayne Allard and Ken Salazar will see through the smoke and join Reps. Diana DeGette and Mark Udall in opposing this particular formula for “reform.”
The rest of Colorado’s representatives supported it.
But then, as Huckleberry Finn might say, all kings and congressmen is mostly rapscallions.
John Aloysius Farrell’s column appears each Sunday. Contact him at jfarrell@denverpost.com or 202-662-8990.
