Estate Taxes on the Agenda

The US Senate spent time last week discussing the future of the estate tax. The Federal Estate Tax, established during World War I, has become a staple of the nation's revenue stream. The tax generates revenues in the neighborhood of $25 billion yearly. The estate tax threshold is now $2 million -- an estate valued over that amount pays a significant amount to the government upon its transfer. The tax is on a gradual phase out plan, but would be back in 2011 for estates valued at $1 million or more unless a change is made.

An unlikely guest of the Senate Finance Committee last week was Omaha Billionaire Warren Buffet. His presence wasn't what was unlikely; his message was. Buffett believes that the estate tax needs to remain in place at a level that would catch a fair number of wealthy estates. Buffett, the 2nd richest person in America, would have stood to have billions go to the Federal government upon his death until he arranged to give most of his money to the Bill and Melinda Gates Foundation, circumventing the tax burden.

Buffett argued that America is at risk for perpetuating a system where a few families hold all the power, and that redistributing the wealth of the very richest upon one's passing is as good a way as any to level the playing field a bit.

There is another reason for keeping some form of estate tax, one which Buffett is showing by example even more so than by what he is saying on the Hill. Having an estate tax encourages philanthropic giving. Some estimates are that the effect that the estate tax has on giving may be as much as $25 billion annually, roughly the same amount as what the government collects through estate taxes! To me, this is the reason to keep a form of the estate tax in place.

While I don't have alot of faith that the $25 million that goes to Washington DC is spent with efficiency, I am very pleased to know that an equal amount is going to innovative organizations that directly help people. I'd love to do a head-to-head analysis of the $25 million that goes to the Feds and the $25 million that goes to private foundations, and see which chunk had the more profound impact on peoples' lives. I think I already know the answer.

There are flaws of course -- small businesses shouldn't be subject to the full tax. A family business valued at $3 million may only throw off $150,000 per year of total income to its operators (and there could be multiple operators) -- taxing them at 50% could force the business to fold. And I'd far prefer a tax that focuses on what is inherited rather than what is given -- if $5 million is left to 25 different grandchildren and their families, that is alot different to me than the entire $5 million going directly to one person.

So ends my estate tax rant.