Why is the Estate Tax So Controversial?

Taxes are a fact of life, whether they are income tax, sales tax, property tax, or a tax on gasoline. We grumble about paying taxes, but accept them. Why, then, is the estate tax so controversial?

For starters, because Congress waffles back and forth about eliminating it. The estate tax was scheduled, in 2001, to disappear permanently in 2010. It has disappeared, but is slated to return in 2011. Like a bad penny, it keeps turning up.

But probably the biggest reason for controversy is over who (or what) the estate tax hits and how much it actually contributes to public revenue. By some estimates the estate tax only provies 1% or less of all public revenue. By contrast, it impacts to the point of destroying some small family businesses. When a small business owner dies his business may be asset-rich but cash-poor. The business may have inventory, equipment, land and other assets that give it a value, on paper, in excess of the exemption amount ($3.5 million the last time there was an estate tax). But there may be very little cash with which to pay the tax. So in many cases, the business has to be sold to pay the tax, leaving a pittance to heirs, compared to the value they would have received had the business been passed on intact.

A similar concern is the fact that the estate tax is one last gouge at a lifetime of savings. Consider, for example, an estate that consists of stocks and bonds that have paid dividends and interest. The money with which those stocks and bonds were purchased was taxed with an income tax before they were even bought. Then the income from the stocks and bonds (the dividends or interest payments) were taxed again as income. The dividends had already been taxed at the corporate level before they were paid. Finally, on death, there is an estate tax levied. That's up to four separate taxes imposed. To a lot of people, that's at least one tax too many.