This week, the Senate is looking to permanently repeal the estate tax. For those of you who think that the estate tax is unfair or un-American, let me try to explain to you how it works, and how repealing it would be the unfair and un-American action. It is important to know that only 2% of Americans will ever pay estate tax. This is because the first $2 million of a decedants estate is exempt from taxes already.
First, you need to understand how a persons assets are measured when they die and how they are passed on. When someone dies, the value of an asset in their estate is the value at the time they die, not the time they purchase it. For instance, if you were to buy 500 shares of Microsoft stock in 1986. The current value of that stock would be $3,600,000. The 500 shares of stock (with the nine stock splits since 1986) would now be 144,000 shares at $25 per share. If you were to sell that stock today (while alive), you would pay approximately $540,000 in capital gains tax. And, if you were to die today, your estate (assuming no other assets so as to make this simple) would be worth $3.6 million, not $10,500, the initial cost of the stock.
Now, lets look at what happens what happens with and without the estate tax.
With the estate tax - If you are married, all of your assets pass on to your spouse with no tax incurred until the death of your spouse. At the time of your spouses death, or if you are not married, then the estate tax is levied. According to the Tax Policy Center, an estate of $3.5 - $5 million dollars paid a average tax of 4.4% of the gross estate. This is because the first $2 million dollars of someone's gross estate is exempt from the estate tax. So, at the time of death, the heirs of your $3.6 million estate would pay about $158,400 in estate tax. That is $381,600 less that if you had sold your stock before death. Since your heirs paid tax on the estate of $3.6 million, they can take ownership of that stock at the current market value ($3.6 million). If they turn around an immediately sell the stock, they pay no additional tax on the sale because it has now "stepped up" in taxable basis. This means, the government views it as if they had bought 144,000 shares of stock at $25 per share. They would only pay additional tax if the stock continues to climb in value.
Without the estate tax - If you were to die with the $3.6 million estate, the entire amount would be passed along you your heirs and the the government would continue to view it as the heirs buying the 144,000 shares of stock at $25 per share. That means, that no tax is ever paid on the stock that has risen from $10,500 to $3,600,000.
Lets step this up one more level. In stead of just using Microsoft stock, lets use Bill Gates himself. His net worth is around $58 billion the last time I heard. Most of it is made up of his own stack shares. If he were to sell his shares today, he would owe the government $870 million dollars in capital gains tax. But, without the estate tax, he would pass on the full $58 billion tax free to his kids. I can only assume that Bill Gates heirs will do just fine with $57,493,000,000. But, with the Veterans Affairs Agency $1 billion short in caring for our nations service men and women, that $870 million would do a great deal of good for them.
By repealing the estate tax, we are allowing the rich, who are already rich, to pass on huge estates tax free so their kids can enjoy a life of luxury. When a vey wealthy American dies, they already pay less tax than the normal American. It is the hard working middle class who is left to pick up the burden to fund education, Medicare, Medicade, Veterans medical, etc. that would normally receive partial funding from the estate tax.
So, what is more unfair, a veteran not getting medical attention or Paris Hilton not being able to buy yet another Prada bag?