10/29/12 9:23 AM – Why Estate Tax Reduces Tax Revenues & Why it’s an Election Issue

I don’t know how many people are paying attention to the estate tax portion of the fiscal cliff and that this election could make a huge difference on this issue.

Under the fiscal cliff, now scheduled to occur in January, estate taxes rise from 35% to 55% with the assets excluded from taxes (the exemption) dropping all the way back down to $1 million from $5 million today. BTW, taxes on dividends also rise from 15% to 43.4%.

Romney says he would repeal the estate tax. Pres. Obama wants to keep it but with a 45% rate and a $3.5 million exemption.

According to the Wall St. Journal’s editorial page today, the estate tax actually costs the U.S. government money. Here’s why.

Quoting the “nonpartisan Tax Foundation and three other independent studies,” the WSJ writes that if the estate tax (aka death tax) were abolished, federal tax revenue would increase. This is because under Romney’s plan to kill the death tax the step-up in cost basis that now occurs on all assets in the deceased’s estate would be abolished, subjecting all inherited assets to a tax of 15% when the heirs choose to sell those assets. This would not apply to tax-deferred accounts like IRAs and 401ks that are rolled over into an inherited IRA.

I’ll let the WSJ explain the other pickup in tax revenue:

“Abolishing the estate tax would also mean higher income-tax revenues. Under current law, billionaires like Warren Buffett and Bill Gates escape the tax by diverting their wealth into charitable foundations. But when income-generating assets are sheltered in this way, these foundations with a few exceptions don’t pay tax on the future income from dividends, capital gains or interest. Eliminate the death tax and fewer people will shelter their money in foundations, meaning the money will continue to earn taxable income.”

Of course, abolishing the death tax would help family farms and family businesses stay in the family after the death of the patriarch. Under current law, those businesses often have to sell the farm or business when the parent dies now, in order to pay the huge estate tax bill.

So, if you like the estate tax, Obama is your man. If you dislike it or would rather have higher tax revenues and take away a huge tax break from the rich, this would be an issue in favor of a vote for Romney.