The State of the Estate Tax: How Much Should Families Pass Down?

What is the estate tax? Does it affect you? What are the tradeoffs of repealing this or any tax?

Republican Representative Bill Thomas of California has proposed a new law that would cut back the estate tax permanently beginning in the year 2010, when President Bush’s tax cut expires.

The estate tax is the tax paid on inheritance by those who inherit more than $1 million.

Thomas’ proposal is less than ideal to the GOP, which wanted a full repeal of the estate tax. This repeal was supported by the House, but Senate Democrats are sharply opposed to the measure, so it will not pass there.

Therefore, Thomas offered an alternate plan that would greatly reduce the estate tax but would not repeal it altogether.

Thomas’ plan

Currently, the estate tax will decrease each year until 2010, when it disappears completely for one fiscal year. The next year, the estate tax will reappear in its original form, in which a $1 million inheritance can be taxed up to 46 percent.

Republicans don’t want to see that happen; the Bush administration says that reducing taxes on this sort of capital will encourage investment and that greater investment will benefit workers - the trickle-down effect.

Thomas’ proposal would increase the exemption in 2010 to $5 million per person and $10 million per couple. Estates worth upwards of $25 million would be taxed at 30 percent.

Democrats take issue with the estate tax

Democrats argue that cutting back or repealing the estate tax would benefit only the very wealthy. To counter this point of view, Democrats are focusing on middle-class problems and how estate-tax dollars could be used to help solve them. They would like to see the estate tax help pay for college tuition.

During a press conference on June 16, 2006, Democrat Dick Durbin (Illinois) explained that repealing the estate tax for ten years would cost $1 trillion -- two-thirds of which could pay all four years college tuition for every high-school student that graduated in 2005.

Democrats say that cutting taxes for the wealthy while raising taxes for the middle class (i.e. higher interest rates for student loans - starting July 1, 2006) is unfair.

If tax policy indicates party philosophy, what are the competing viewpoints here?

Republicans believe that families have the right to pass down wealth and that the government should not interfere with that. Further, they believe that less taxation equals a more fluid economy, which benefits all.

Democrats believe that government should tax inheritance as it does other capital gains and that that money should be invested in education, which they say creates jobs and benefits all.

What do you think?

At issue is the right to pass down large fortunes. Should families be able to pass down wealth from generation to generation without paying taxes? Or should the government tax inheritance ? What do you believe taxes should be used for?

Your input matters

Your representatives DO care what you think. Especially now -- 2006 is an election year and many representatives will be looking to reconnect with their constituents. Let your congressmen and women know what you think! Give your senators a piece of your mind! To find your reps, click here.

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Article Posted on: 6/24/2006