THE WALKING DEATH TAX / THE WALL STREET JOURNAL REVIEW & OUTLOOK ( RECOMMENDED READING )

REVIEW & OUTLOOK

DECEMBER 5, 2010, 8:48 P.M. ET.

The Walking Death Tax

Without Congressional action, it returns with a 55% rate vengeance in 26 days.

Overlooked in the brawl over expiring Bush-era tax rates is what will happen to the death tax. Without action in the lame duck Congress, the estate tax will rise from the dead on January 1 with a vengeance, the rate climbing back to 55% from zero this year. The exemption amount will revert to a miserly $1 million, unindexed for inflation, so more middle class taxpayers will get hit year after year.


President Obama and Congressional Democrats don't think this is a high priority, but voters do. A November Gallup Poll found that Americans think that keeping the estate tax "from increasingly significantly" is "very important" by 56% to 17% "not too important." That's more than think it is a priority to extend current tax rates (50%), extend jobless benefits (48%), ratify the Start treaty (40%) or let openly gay men and women serve in the military (32%).


Liberals are content to let the rate revert to 55%, with some moderate Democrats arguing for a 45% rate. Republican Jon Kyl of Arizona and Democrat Blanche Lincoln of Arkansas are pushing a compromise that would lower the top rate to 35% with a $5 million deduction. That rate is still 35 percentage points too high for our liking, but we'll take it as an alternative to the greedy political confiscation of more than half of the wealth built by someone who has saved over a lifetime. An estate of $5 million isn't all that much for a successful and thrifty business person with some real estate to accumulate over 50 or 60 years.


Mr. Obama, who professes to care about small businesses and jobs, should pay attention to new estimates by the Joint Committee on Taxation. The committee finds that reverting to the 55% rate with a $1 million exemption will tax roughly 10 times more small businesses and farms than would Mr. Kyl's proposal. A recent study by Doug Holtz-Eakin, the former director of the Congressional Budget Office, finds that the estate tax reduces savings and capital formation and forces family businesses to liquidate at the time of an owner's death, which puts hundreds of thousands of jobs in peril.


As for the deficit, Congress could give relief to families and enhance revenue collections by lowering the gift tax rate to 10% or 15% from 35% on any gifts above $13,000 a year. This would allow parents to pass along more money to their kids and grandkids while they are still alive, increasing federal tax collections in the next few years by billions of dollars.


The Gallup results confirm that voters intuitively understand this tax isn't really about socking Bill Gates or Warren Buffett. Those two billionaires, like most others, have made sure they'll escape the grim tax reaper by parking most of their wealth into tax-exempt foundations. That may explain why the estate tax is so fiscally inconsequential, raising barely 1% of all federal revenue (0.6% in 2009).


At least 10 Senate Democrats have campaigned at one time or another for death tax repeal or relief. The next few days will determine whether they were telling the truth. The result will tell us if Congress is turning to a tax agenda rooted in growth and fairness, or sticking with the policy of government greed and envy that has defined the last four years.


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