A Brighter Idea For The Estate Tax

While Senator Jon Kyl (R-AZ) is leading the charge for a smaller estate tax, five liberal Senators have come up with a more progressive scheme.

They call it the Responsible Estate Tax (S. 3533) because, as principal sponsor Senator Bernie Sanders (D-VT) says, it would “ensure that the wealthiest Americans … pay their fair share” and, in the process, help reduce the federal debt.

The bill starts from the same place as President Obama’s proposal — a reinstatement of the 2009 stage of the estate tax phase-out, plus some loophole closers worth an estimated $24 billion over the next 10 years.

Specifically, the first $3.5 million of estates left by individuals and the first $7 million left by couples would be exempt from the tax. This would, at least initially, give a free pass to all but about 0.3% of estates. Above the exempt levels, the first $10 million would be subject to a 45% top tax rate.

The President’s proposal would extend this same rate to estates worth billions. Under the Sanders bill, the rates would step up.

  • Estates valued at over $10 million but less than $50 million would pay 50%.
  • Those over $50 million would pay 55%.
  • Those over $500 million for an individual or $1 billion for a couple would also pay a 10% surtax.

Sanders says that his proposal would raise $264 billion over the first 10 years. Try as I might, I haven’t been able to find a current estimate of what the President’s proposal would bring in.

One thing is certain. Sanders and colleagues could have done even more to reduce the deficit if they’d ignored the oft-debunked, but still live hoo-hah about how the estate tax spells the death of family farms.

Last year, the Tax Policy Center estimated that only 100 family farms and other small businesses would owe any estate tax. (This figure has been variously cited as 110 and, by Sanders, as 80.)

TPC has also estimated the average effective tax rate for family farm estates at 11.3% — well below the overall average rate of 18.9%. This is in part because farms have benefited from some special protections. The Sanders bill would significantly expand two that apply only to farms.

One is a unique deduction for the value of land covered by a conservation easement, i.e., an agreement that transfers land to a government agency or qualified nonprofit with restrictions on development that preserves assets like open space and natural habitats.

Another is a provision that allows a higher exemption for farmland and certain other assets. Basically, one can reduce the valuation of these assets by a set percent of their market value, e.g., what the land would be worth if it were used for, say, commercial development. Last year, the maximum exemption was $500,000. As with other provisions in the estate tax, it doubled for couples.

The Sanders bill would increase the maximum deduction for easements from $500,000 to $2 million and also increase the base percentage by 20%. The maximum for the reduced valuation would be increased to $3 million for a couple. As in the 2009 rules, this amount would be indexed to the rate of inflation.

Sanders and most of his initial cosponsors represent states with significant farming interests. So they may see a political advantage in these giveaways. I’m guessing they also hope to win over other Senators, especially Republicans, from states with similar interests.

If they can — and I’m rather doubtful — it would be a small price to pay for what would certainly be a more reasonable estate tax than anything else that’s been proposed.

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