The Politics Around Inheritance Tax Laws

Inheritance tax laws exist on the state level in several states. These laws work in concert with federal estate tax laws that are designed to levy a tax as high as 55 percent on property received from a deceased person’s estate.  State laws regarding inheritance taxes vary significantly so for our purposes and in support of what this article is trying to discuss, we will limit comments to the federal estate tax laws.

In Favor of the Federal Estate Tax System

Both sides of the discussion view the system of estate taxes in the United States differently.  Those in favor of the federal system of estate taxation see it as a redistribution of wealth and a way to ensure that wealthy individuals do not avoid paying their fair share in taxes and support for the services provided by government for the public.  A tax of up to 55 percent on assets in excess of $2,000,000 allows the federal government to pay for infrastructure repairs such as roads and bridges and other improvements.

Against the Federal Estate Tax System

Those on the opposite side of the debate vehemently oppose the federal estate tax system.  It is viewed a draconian attempt to impose a socialist agenda against rich people and discourages investment and innovation.  Free market advocates and those considered pure capitalists believe that a federal estate tax system imposes a penalty on those who through no fault of their own, benefited from their talents and efforts to earn money and build wealth.  A tax on the value of a deceased person’s estate is repressive and discriminatory.

Economic Growth and Tax Relief Reconciliation Act of 2001

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA).  EGTRRA sought to rebalance the federal taxation system by lowering federal income tax levels and increasing the amount of a person’s gross estate that can be excluded from estate taxes.  Prior to EGTRRA, the maximum allowable exclusion amount on an estate was $675,000.  After passage of the Act, the exclusion amount went to $1,000,000, $1,500,000, $2,000,000 and $3,500,000.  In 2010, the federal estate tax is eliminated and in 2011 the maximum rates pre-EGTRRA are restored with the exclusion set at $1,000,000.

Controlling the Debate on Federal Estate Taxes

Those who believe that the federal estate tax changes under EGTRRA created many recent economic problems including a near collapse of the financial markets in 2008, seek to increase the federal estate tax and make the rate higher than 55 percent.  Those who do not see a correlation between the collapse of the financial system and the repeal of the estate tax would like to see it become permanent after 2010.  Whichever side has control of Congress after the mid-term elections will be able to set much of the debate concerning estate taxes and the taxation of inheritances received in this country.