Divisions among Democrats are undermining President Barack Obama‘s push to raise the US estate tax on inherited wealth, just weeks before the arrival of the ‘fiscal cliff’ could drive the present estate tax rate even higher than Obama proposes.
The estate tax’s impact extends beyond farmers and ranchers. It applies mostly to very wealthy Americans
Action on the estate tax could be postponed. But in his successful re-election campaign, Obama called for wealthy Americans to pay more in taxes – and it is overwhelmingly the wealthy who pay the estate tax.
The outcome may hinge on whether Obama insists on his estate tax proposal – or something close to it – as forcefully as he has insisted on raising individual income tax rates for high income-earners, or whether he lets the issue be put off.
If a single facet of the complicated partisan stand-off over taxing the wealthy best captures Capitol Hill’s fiscal gridlock, it may be the estate tax – a long-standing and volatile issue – that may finally be coming to a head.
“If you look at where the public is on tax issues compared to the last time this was debated – it is night and day,” said Frank Clemente, campaign manager for left-leaning Americans for Tax Fairness. “They are deep into this tax fairness position”.
The ‘fiscal cliff’ is a collection of federal tax increases and automatic Government spending cuts that, if allowed to take effect as scheduled early in 2013, could push the US economy into recession, according to economists’ forecasts.
Part of the picture is the estate tax. Under laws signed a decade ago by former Republican President George W. Bush, the estate tax is applied to inherited assets at 35 per cent after a $5 million exemption.
That means a deceased person can pass on an inheritance of up to $5 million before any tax applies.
Inherited wealth passed to a spouse or a federally recognised charity is generally not taxed.
Obama wants to raise the rate to 45 per cent after a $3.5 million exemption. If the Bush rates are allowed to expire and Congress does nothing, the rate will shoot up next year to the pre-Bush levels of 55 per cent after a $1 million exemption.
New York Senator Charles Schumer on Thursday said the Democrats‘ proposal to avert the ‘fiscal cliff’ involves $1 trillion in immediate deficit reduction that includes new revenue from raising the estate tax to the level proposed by Obama.
No less a power broker than Democratic Senate Finance Committee chairman Max Baucus said this week, however, that he wants to hold the estate tax steady at current rates.
Baucus is up for re-election in 2014 from Montana. He says ranch and farm owners in his state would stand to lose if federal taxes rose on passing property to heirs.
But one thing is clear: the voice of farming lobbyists is registering with Democrats on the volatile estate tax issue, although it is only marginally about farms and ranches.
The estate tax’s impact extends beyond farmers and ranchers. It applies mostly to very wealthy Americans, whose taxes have been specifically targeted for increase by a President whom voters returned to the White House just three weeks ago following a tough campaign in which taxes were a key topic.
Of the 3,600 estates subject to the estate tax this year, only 100 are classified as farming estates, according to the congressional Joint Committee on Taxation.
The wealthiest 10 per cent of Americans pay nearly all of the estate tax under current rates, according to the Tax Policy Centre, a non-partisan fiscal policy think tank.
The number of estates subject to the tax would double under the plan proposed by Obama.
About 300 farming estates would be subject to the tax under Obama’s terms, which would raise about $100 billion in new revenue for the Government over 10 years.