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GRASSLEY SAYS ESTATE TAX $4-5 MILLION EXEMPTION, 15% RATE LIKELY

September 08, 2005

Buried in the Tax Analysts subscriber-only rundown of autumn tax legislation (shorter free version here) is this little nugget:

The timing for a vote on estate tax repeal is also uncertain, even as Grassley continues narrowing down the compromise possibilities. Before Senate Majority Leader William H. Frist, R- Tenn., called off a scheduled vote on full repeal, Grassley said compromise efforts had narrowed the range of a deal to include a $4 million to $6 million exemption and a 15 percent to 35 percent tax rate. In a phone call with reporters on September 7, Grassley said he now expected a deal with an exemption "somewhere between $4 [million] and $5 million" and "a 15 percent tax rate."

That's huge. While Grover Norquist and his allies will not be satisfied with anything short of full repeal, this kind of compromise might actually be close to an optimal policy result, from my point of view. The advantages:

Low Rates. When rates get down to 15%, the stakes in the estate planning game go way down. This makes it politically possible to simplify the byzantine estate tax system. It also greatly reduces the incentive to game the system via valuation discounts and business structures built around a confiscatory 48% top rate.

Large Exemption. The pre-2001 estate tax, with its 50%+ rates, only survived as long as it hardly applied to anybody. As inflation and the rise in two-earner families pushed many families net worth over the old $600,000 exemption, even simple wills had to come with credit shelter trusts to avoid wasting one spouse's unified credit. A $4 million to $5 million credit restores the "audience" for the estate tax to something more like it was when the current version was enacted in the 1970s.

Basis Step-up. While Professor Maule doesn't seem think it's such a big deal, those of us who do income tax returns for a living do. Even for living taxpayers, it can take a lot of unproductive time and expense to determine the basis of long-held property. Dead people have even worse memories. The basis step-up, and the imposition of a tax at a rate approximating the capital gain rates, is very useful in administering the income tax system and ensuring that large gains are taxed eventually. Its much easier to use Yahoo Finance to determine date of death market values than to try to reconstruct the basis of stocks purchased originally through E.F. Hutton and Kuhn Loeb.

Low rates and a broad, simple base go together; as rates go up, loopholes proliferate. Amazingly, we may actually see something like good tax policy emerge from Congress.

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