'Paris Hilton Tax' Vs. 'Death Tax': A Lesser-Known Fiscal Debate
December 11, 2012
Ben Franklin famously observed that nothing is certain but death and taxes.
So far, Congress hasn't repealed the former, but the future of estate taxes — a largely overlooked piece of the "fiscal cliff" — remains uncertain as this year draws to a close.
Until now, most of the year-end tax debate has focused on the income tax, but another battle could be brewing over estate taxes.
Economist Jared Bernstein of the Center on Budget and Policy Priorities says if the estate tax fight has been overshadowed so far, there's good reason: Almost nobody pays it. "Everybody dies, but just the richest 2 in 1,000 estates would be hit by the estate tax right now," he explains.
In 2012, only estates worth more than $5 million owe any tax. President Obama wants to lower the threshold to $3.5 million and raise the estate tax rate from 35 percent to 45 percent.
Even with those changes, Bernstein says, the vast majority of people would be still be exempt.
"You'd go from 2 in 1,000 of the wealthiest estates to 3 in 1,000 of the wealthiest estates," he says. "So you're really talking about a very rarefied atmosphere up there at the tippy top of the wealth distribution."
There's a lot of money at stake, though. The president's plan would bring in an extra $120 billion over the next decade. Obama would seem to be in a strong bargaining position because if no deal with Congress is struck, the tax goes up even more sharply — to 55 percent — and it would be applied to estates worth as little as $1 million.
While the president's plan seems moderate by comparison, he faces some pushback from members of his own party. Democratic senators like Max Baucus of Montana, Mary Landrieu of Louisiana and Mark Pryor of Arkansas have all come out against any increase in the estate tax.
Pryor says he's trying to protect those whose wealth puts them just over the threshold.
"Most of the superwealthy, they're going to set up foundations and they're going to do all these other things. They're probably not going to pay much estate tax anyway, to be honest with you," he says. "This is really for people who own small and midsized businesses."
Opponents of the estate tax often point to sympathetic family farmers who could be affected. Pat Wolff of the American Farm Bureau Federation says it's not unusual for farmers and ranchers to have 80 percent of their wealth tied up in land.
"A farmer may look like he's worth a lot of money on paper, but really his assets are illiquid. They are land," Wolff says. "So when the estate tax comes due, a farmer could have to sell off a piece of his business to come up with the cash to pay the estate tax."
Advocates for the estate tax scoff at that, noting that farmers represent a very small fraction of those affected by the levy. They add there are provisions in the law that allow farm families to pay in installments, so they don't have to sell off their land.
Economist Bernstein says at a time when the government is looking for additional revenue to help cut the deficit, the estate tax is a reasonable place to turn.
"People call it the 'Paris Hilton tax' for a reason," he says. "We live in an economy now where 40 percent of the nation's wealth accumulates to the top 1 percent. And when these folks leave bequests to their heirs, we're talking about bequests in the tens of millions."
If supporters call the estate tax the "Paris Hilton tax," opponents brand it the "death tax."
Pryor says opponents have done a good job of getting their message across.
"I've been in Little Rock, and I've had a waitress come up to me and say, 'Whatever you do, get rid of the death tax.' Well, there's virtually no chance that she would ever have to pay it," he says. "But nonetheless, in hearing the discussion on the radio and watching the talking heads on TV, she's convinced that everybody when they die, they have to pay some sort of tax. And that's just not true."
But while most Americans can afford to ignore the estate tax debate, those few at the top will have to keep wondering who pays and how much.
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