By Joseph J. Thorndike
February 2011
In the annals of American fiscal history, 2010 was nearly a tragic anomaly. Thanks to a legislative maneuver engineered by Republicans in 2001, the federal estate tax was slated to disappear on January 1, 2010, only to come roaring back on the first day of 2011. Few expected this one-year tax holiday to actually materialize; most thought Congress would approve permanent repeal well before the whipsaw deadline. In fact, though, lawmakers did allow the estate tax to disappear. And then, in the waning days of 2010, they seemed certain to let it return, too.
No longer hoping for complete repeal, Republicans made the case for a diminished tax, relying on a range of familiar arguments. The estate tax, they insisted, was unwise, unfair, and unpopular. It slowed economic growth by depleting investment capital, costing average workers their jobs even as it cost wealthy Americans their birthright. It placed unreasonable burdens on small businesses and family farms, forcing many to liquidate in the face of crushing tax bills. Perhaps most damning, it flouted American values like thrift and hard work. “The American dream is that you can start from nothing in this country and you can build something and you can give the fruits of your labor to your children,” declared Sen. Kay Bailey Hutchinson in late 2010. “Who are we to take that away?”
These were old and well rehearsed arguments. But they were not convincing ones. Since at least the 1920s, estate tax opponents had been trotting out the same litany of warnings and complaints. But the estate tax has been a vital feature of the federal tax system for almost a century, and somehow the economy has continued to grow, small businesses have managed to thrive, and Americans have held on to their dreams. Indeed, the estate tax has helped make those dreams possible by ensuring that federal tax burdens are distributed more fairly and progressively than they otherwise would be. Far from being some sort of monstrous creation of a left-wing conspiracy, the estate tax has been a relatively modest but wholly vital instrument of progressive taxation.
