They say that everything is relative and when you look at the recent changes to the estate tax it is a good idea to keep this truism in mind. The estate tax was repealed for 2010 but the last time it was in effect in 2009 the exclusion amount was $3.5 million and the rate of tax was 45%. This would represent a meaningful point of relativity when you consider the fact that the new “tax relief” bill that was passed and signed into law in the middle of December allows for a 35% maximum rate of taxation and a $5 million exclusion. So relatively speaking the changes provided a very slight improvement.
But when you look at the estate tax as it stands right now relative to whether or not it should be imposed at all you’re looking at an entirely different equation. While you’re working your earnings are taxed, so after paying income and Social Security payroll taxes you are left holding just a fraction of what you originally earned.
Americans take that remainder and do what they can with it. If you follow the path set before you and seek out the American Dream as it were you may be able to use this remainder to build some wealth. As you enter your twilight years that nest egg is the product of after tax-earnings. So when you pass away and leave it to your loved ones there is no logical reason in the world why it should be taxed yet again at a draconian rate of 35%.
This is why a repeal of the estate tax is more fair than any sort of reduction in the rate of the tax or increase in the exclusion. With that in mind there is some optimistic news to report from Capitol Hill. There are currently five separate bills circulating that call for a repeal of the estate tax: H.R. 86, H.R. 99, H.R.143, H.R. 177, and H.R. 123.
It’s nice to see that this idea is gathering momentum and we will see how it plays out as the 2012 election cycle starts to seize the headlines.