The estate tax BS comes back with a vengeance

The estate tax repeal is set to expire at the end of the year, meaning that anyone unfortunate enough to die in 2011 and beyond will be subject to it again. Predictably, and compounded by the fact that it’s an election season, the right is throwing itself a nice little tantrum about the “death tax”.

In case you’re wondering to yourself, “well gee, Hanlon, in this climate of impressive campaigning, just how slimy and idiotic could these efforts go?” I have the answer. It lies in Wyoming, where Rep. Cynthia Lummis is claiming that elderly people are planning on dying before the estate tax hits, so we’d better stop it before they do so.

“If you have spent your whole life building a ranch, and you wanted to pass your estate on to your children, and you were 88-years-old and on dialysis, and the only thing that was keeping you alive was that dialysis, you might make that same decision,” Lummis told reporters.

Okay, fine. We’ve seen this before, so we expect it. But the problem is that the media really isn’t helping. FOX throws up this convenient little blurb that manages to conflate, twist, and mislead all while appearing to be informative. It’s an impressive trick.

The tax’s top rate in 2009 was 45 percent, but estates smaller than $3.5 million — or $7 million in the case of married couples — were exempt. That left less than 1 percent of all estates subject to the tax.

Without further action from Congress, the estate tax will return in 2011 and will affect more heirs, with a lower exemption — $1 million — and a higher top rate — 55 percent.

There are a few problems here, and it’s something I’ve written about quite a few times: the concept of marginal tax brackets. The sleight of hand in FOX’s second paragraph up there relies on the reader making two key assumptions:

  1. The top rate applies to everyone
  2. The top rate applies to every penny of estates worth over $1 million

Of course, neither of those things are true. The way they write it, people would be (understandably) in terror at the concept of only being able to keep roughly $450,000 of their $1,000,000 estate, watching half of it get frittered away to the federal government. It’s a terrible notion, and fortunately it’s just completely false on its face.

See, The exemption means that any value your estate has up to $1 million is untaxable. If you have an estate that’s worth $1,000,001 then you’re only going to be paying taxes on $1 of it. And the “top rate” doesn’t kick in until quite a bit up the ladder. For help on this, let’s turn to the 2006 CRS report on the subject (PDF).

I admit it can get a little hairy, but fortunately they’re willing to lead you through the calculations. Here’s one of the example tables for someone dying in 2007 with a $5mil estate (refer to the document for the tables this refers to).

You may notice that $1,350,000 is a lot less than 45% (the top marginal rate) of $5,000,000. In fact, it’s a full $900,000 less. That amount there is a paltry 27%. Why the change? Well that requires some careful dissection.

What happens here is that the brackets start at $0 above the exemption line and continue up (in this case) to $1,500,000 above it, which is where Row 2 Col A came from. That $1.5mil is taxed as the sum of the percentages of each bracket below it, which is why the total tax there is about 35%. The brackets range from, at the bottom,18% up to 45% in this case, or 55% come 2011. The remainder is taxed at the full 45%, and then the tax amount on all of THAT gets subtracted by the tax credit for the exemption amount to ensure that your first two million isn’t hit by the tax.

Long story short: on a $5,000,000 estate in 2007, $3,500,000 of it gets taxed at a graduating rate. The whole shit and shabang isn’t taxed at 45%. And this will continue to be true in 2011. That formula will continue to apply (the report doesn’t contain the exact brackets). So this notion of the government swooping in and stealing half of your shit? It’s a lie. You have to be pretty high up in the numbers before you start owing any real money.

But by leaving out all of the details, and simply stating that the tax has “a lower exemption — $1 million — and a higher top rate — 55 percent,” FOX creates the impression that people who barely scraped by to get up into the million-dollar-estate club are going to see more than half of it get sucked up by the greedy guv’mint.

That’s how these laws get repealed, and how our economy suffers: by dishonesty from the media. Create a panic about something that isn’t happening and the people will fight against the illusion.

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3 responses to “The estate tax BS comes back with a vengeance

  1. That’s an excellent refutation of the right’s lies about the estate tax. There are a lot of wealthy donors who are paying a lot of money to get politicians and pundits to sling that bull.

  2. Why should the gov. get any of it??????

    • Mainly because all of us benefit from the government, but the rich benefit the most. They fly more; more of their goods are transported over our highways; they have legislators in their pockets, protecting their interests; firefighters protect the second (third, fourth) homes they build in inaccessible, fire-prone areas; police protect their property and keep the working class in line; “national defense” spending obviously works for them (since they never bitch about it). If you think really hard, u can probably come up with some other reasons.

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