An estate tax deal: pay now, die later
News reports suggest that the Senate may soon consider restoring the estate tax with an option allowing people to prepay their tax before they die. Details are apparently still in flux as senators negotiate. We鈥攁nd maybe they--don鈥檛 know yet what they鈥檒l propose for the basic estate tax but it鈥檚 unlikely to be harsher than the 2009 version.
Right now, we have no estate tax. When the Senate failed last year to 鈥攁 $3.5 million exemption and 45 percent tax rate鈥攖he tax disappeared as scheduled by the . But when the full 2001 law sunsets at the end of this year, the estate tax will reappear in all of its pre-2001 glory鈥攁 $1 million exemption and a 55 percent top rate. Those who favor the smallest possible estate tax don鈥檛 have the votes to repeal it entirely and hope instead to shrink it. They also know that deficit hawks will oppose changes that increase the deficit, so they have to find palatable tax increases to offset the reductions they want. And, , they鈥檙e limiting their search for offsetting revenue to the estate tax itself.
That may explain why Senator Jon Kyl (R-AZ) is reportedly mulling a prepaid estate tax that would generate tax revenue within the 10-year budget window but lose tens of billions of dollars beyond that.
We don鈥檛 exactly how the proposal would work, but here鈥檚 one version: People could create 鈥減repayment trusts鈥� into which they could transfer any assets they choose (subject to the assets not having an overall capital loss). Over five years, the trust鈥檚 owner would pay a 35-percent capital gains tax on the accumulated gains of the transferred assets and the assets鈥� bases would become their values at the time of transfer. When the owner dies, the trust would go to the heirs without incurring any estate tax. Because the trust pays tax up front but nothing when the owner dies, revenue gains show up in the 10-year budget window while much of the revenue loss doesn鈥檛 occur until the distant future where it doesn鈥檛 count under PAYGO rules. The option provides two big tax breaks: there鈥檚 no tax on the owner鈥檚 basis of assets transferred to the trust and any subsequent profits are taxed at the preferential capital gains tax rates. What鈥檚 not to like?
A couple of things. As my colleague Joe Rosenberg points out, the prepayment option would benefit people with liquid assets who could pay the capital gains tax on assets put into the trust. But small businesses and family farms鈥攖he groups for whom opponents of the estate tax express greatest concern鈥攚ould be hard pressed to pay the tax on their illiquid assets. And, as long as the top tax on long-term capital gains is less than 35 percent, the wealthy could realize gains on their assets, pay the gains tax, and transfer the assets tax-free to a prepayment trust. TPC colleague Eric Toder notes that the way around that problem is to raise the tax on gains to 35 percent. Doing so would deal with lots of tax problems鈥攂ut that鈥檚 a topic for another day.
Keep in mind, too, that Kyl only has to pay for part of the lost revenue. Congress has already agreed to ignore any cost of extending the 2009 rules for two years鈥攁 tab topping $30 billion.
A pre-paid estate tax would not only save the wealthy lots of money; it would also continue the full employment of estate tax lawyers. Plus many wealthy families would have to hire financial analysts to help pick the assets to put into the trusts. It surely won鈥檛 simplify the tax. And, at a time when the U.S. faces huge future deficits, it would produce a windfall for a few thousand of the nation鈥檚 wealthiest families.
------------------------------
海角大神 has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
