Regardless, and without fail, the Estate Tax always seems to float to the surface as a topic of discussion or rhetoric (depending how you look at it), and I figured I would take a minute to briefly touch on what the Estate Tax is, factually, and to also preemptively address some of the arguments, claims, and disputes made about the Estate Tax.
The Estate Tax has been enacted in one form or another since 1797, when a stamp was required to be purchased and affixed to Wills in order for them to be probated. The purchase price of the stamp was in effect, a tax, and the presence of the stamp denoted payment of that tax. No stamp, no Will. Since then, the tax has disappeared and reappeared few times, and in the 18th and 19th centuries, was primarily used as a war funding strategy.
The Estate Tax as we know it today was enacted in 1916, and although the internal workings of the tax have changed many times, the basic structure has remained the same--essentially, a specific tax rate is applied to the total value of one's estate upon their death. There is an exclusion amount, meaning that all estates (or portions of an estate) below a certain amount are not taxed at all. For example, if the exclusion for a certain year is $5,430,000 (which it is for 2015), all estates under $5,430,000 would not be taxed, but any estate greater that $5,430,000 would be taxed at the applicable rate. There are multiple rates and pages of laws defining what is included in one's estate, but the basic structure is relatively simple.
From The Left
Consistent with liberal tax policy, we will hear arguments from the Democrats for either a reduction in the exclusion amount, thus exposing a greater number of families to the tax, or increasing the applicable tax rate, which maximizes the tax revenue generated from families that would be paying the tax regardless. Arguments made from the left will most likely be a call for change to a combination both of these areas.
From The Right
Consistent with Conservative tax policy, we will hear arguments from the Republicans to reduce as much estate tax exposure as possible. Republican positions regarding the Estate Tax have often included an outright repeal of the tax in its entirety--essentially eliminating its existence. Although such initiatives would be possible (and not as devastating as some analysts claim), given the extensive history of the existence of the tax, are widely regarded as anti-tax propaganda. Where legitimate conservative tax policy focuses on is on the increasing the exclusion amount, thus dropping more and more families into the zone below the exclusion, and thus not even paying the tax. Republicans also push a combination of changes to the exclusion amount and tax rates resulting in an overall lesser tax paid.
Campaign Talking Points
The Estate Tax is ripe with conclusions to be drawn, and pictures to be painted to sway the voting public one way or the other. I have noted a few things we will hear over the next year and a half, and the facts behind them:
- Years ago, Republicans coined the phrase, "The Death Tax" to refer to the Estate Tax. Not being fans of the Estate Tax, making it sound as oppressive and nasty as possible was the goal here. The phrase stuck, and keep in mind that whenever you hear the phrase, "The Death Tax," the references is to the Estate Tax.
- Democrats generally claim that repealing the Estate Tax is a huge hit to federal tax revenue, and essentially walking away from massive income the country has relied on for over one hundred fifty years. The truth is that the Estate Tax generates less than 1% of federal tax receipts. Although over time this adds up, it is not nearly the money maker some liberal candidates claim it is.
- Republican candidates will surely describe the imposition of the Estate Tax as one that affects a huge percentage of the voting public--an issue that hits the home of every American. Although Democrats and Republicans alike have their philosophical reasons for tax policy, I will not attempt to address the merits of such. However, only 5,400 families are expected to pay the Estate Tax this year. Out of about 2.6 million deaths, actual Estate Tax Payers account for 0.2% of all possible Estate Tax Payers...not a huge actual impact.
- Coming from the Democrats, we will be told how a repeal of the Estate Tax will essentially be a "giveaway to the rich," and a perpetuation of years of "failed policy resulting only in a benefit to the upper class." The truth is the Estate Tax is an easy bullet to dodge. Basic Estate Planning and/or Estate Administration can double the Estate Tax Exclusion for a married couple, and some careful planning ahead of time can completely eliminate Estate Tax exposure. Families that eventually end up paying the Estate Tax are typically families that could have planned better, or could have been more flexible in their planning.
There are certainly valid arguments for Estate Tax reform, and keeping the status quo. The purpose of this post was not to discredit any such arguments, or even address them, but rather to note the obnoxiously incorrect and flagrantly exaggerated statements we will be hearing in the months to come. I realize I made some pretty elementary generalizations of political parties, so please take my phrasing with a grain of salt. The assumption is the stereotypical "conservatives against taxation" and "liberals for taxation," and although I will be the first to agree that such statements ignore the intricacies of national politics (and even actual contrary political initiatives), I believe that for the purposes of identifying these claims (and rhetoric), it is a good start.