Friday, December 11, 2009

A game of chicken over the federal estate tax

The House has voted to make the 2009 federal estate tax regime permanent. Apparently, they don't have 60 votes for that in the Senate. They might have 60 votes for a $5 million exemption and 35% tax rate, the bipartisan compromise that was voted down in the House. With the Senate bogged down in health care. the Wall Street Journal calls instead for letting the estate tax expire.

The Journal advocates for carryover basis. Although there is logic to their argument, it is virtually impossible to implement and administer. Especially because the complexities are compounded with special rules to exempt smaller estate and protect surviving spouses. Says the Journal:

But the best strategic outcome now is to let the death tax expire in January as scheduled under current law, and return to this debate next year when the tax rate is zero. Then let liberal Democrats explain to voters on the eve of elections that they must restore one of the most despised of all taxes.

This is a dangerous gamble. Advocates for full repeal seem to want to call the bluff of Democrats. But liberals in turn might be willing to accept a year without a federal estate tax if it means that the exemption goes back down to $1 million in 2011.

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