Madoff Op Ed on Federal Estate Tax
11/23/09--HOW do you tell a wealthy heiress
from a family farmer? It sounds like the setup for a joke. But in fact
it is the fundamental problem underlying sensible reform of the federal
NEW YORK TIMES
November 21, 2009
Protect the Farm, Tax the Manor
By: Ray D. Madoff
HOW do you tell a wealthy heiress from a family farmer? It sounds like the setup for a joke. But in fact it is the fundamental problem underlying sensible reform of the federal estate tax.
Members of Congress are hoping to revise the current law on the estate tax by the end of this year; if they don’t, the estate tax will disappear for a year. Lawmakers should use the opportunity to solve the farmer/heiress riddle once and for all and move our tax system closer to the values on which the country was founded — that hard work should be rewarded and power should not be conferred by birth.
The last time the estate tax was changed was in 2001. At that time, President George W. Bush and the Republican Congress sought to repeal the estate tax immediately, but settled for establishing gradual changes, which over eight years increased the amount of an inheritance that could pass free of tax to $3.5 million from $1 million, and reduced the maximum estate tax rate to 45 percent from 55 percent. Next year, the law calls for there to be no estate tax at all. Then, in 2011, everything is to abruptly reverse course, returning to pre-2001 tax act levels: a $1 million exemption and a 55 percent tax rate.
Policymakers agree that this here today, gone tomorrow and back again structure should not stand. But what should be done?
Proponents of the estate tax, mainly Democrats, argue that we should return to lower exemptions and higher rates so that the wealthy can contribute much-needed dollars to the nation’s recovery.
Opponents, mainly Republicans, argue that there should be no estate tax at all, not just next year but forever, because of the burden on small-business owners.
President Obama has proposed a middle course: blocking the scheduled 2010 repeal but making permanent the $3.5 million exemption and the 45 percent tax rate we have now. That would mean less revenue from estate taxes over the next 10 years than if Congress did nothing to change the 2001 law — an estimated $233 billion less. Moreover, this approach would leave in place the Achilles’ heel of the estate tax — its potential harm to family farms and small businesses — while providing an unnecessary giveaway to Americans who least need it.
Instead, Congress and the president should forge a different compromise that would respond to the concern for the family farmer and business owner, but still impose appropriate taxes on the wealthy heiresses — and heirs — of America.
What’s needed, to begin with, is a special rule to facilitate the transfer of family farms and small businesses from one generation to the next. While experts disagree on whether the estate tax has in fact impeded such transfers, the idea that it could is bothersome to Americans. It is important to us that children be able, if they so desire, to carry on the work of their parents. Thus, it is appropriate for the estate tax to have a large exemption for family businesses — perhaps as much as $10 million, and indexed to rise with inflation.
In order to ensure that this benefit goes to the right taxpayers, the law should require that both the transferring and receiving generations participate in the business or farm for several years and that the enterprise make up a significant portion of the estate.
Sound complicated? Fortunately, the hard work in drafting this provision has already been done. From 1997 to 2001, the law included a similar rule for family-owned businesses. Its protections were too limited, however, providing a maximum exemption of only $675,000 — not enough to cover many farms and small businesses. By raising the maximum exemption, President Obama and Congress could resolve the family-farmer and small-business problem for good.
Then, we could have a meaningful debate about the appropriate tax for inherited wealth. There is a big difference between wealth acquired through hard work and creativity and wealth bestowed as an accident of birth, and Congress should not be afraid to make this distinction. Keep in mind that inherited wealth is completely free of income taxes. Thus, while a person who earns $200,000 by working must contribute more than $50,000 in federal taxes, a person who inherits $200,000, or even $200 million, pays no income taxes at all.
The estate tax system provides an essential counterpoint to this giveaway. American estate tax rates have been as high as 77 percent, so 55 percent would be reasonable when coupled with a general exemption of $1 million to $2 million.
For too long, the family farm and business issue has served as a distraction, preventing sensible estate tax reform. Congress should get this issue off the table, so that wealthy heirs can contribute their fair share.
Ray D. Madoff, a professor at Boston College Law School, is the author of the forthcoming “Immortality and the Law: The Rising Power of the American Dead.”