Does Blanche Lincoln Even Understand The Estate Tax?

It’s no secret that Sen. Blanche Lincoln (D-AR) — along with her Republican counterpart, Sen. Jon Kyl (R-AZ) — are on a quest to cut the estate tax, slashing taxes for the heirs of multimillionaires. Instead of reinstating the currently expired estate tax at the 2009 level (45 percent, with a $3.5 million exemption), Lincoln and Kyl want to cut the rate to 35 percent and raise the exemption to $5 million.

As I noted earlier this week, Lincoln and Kyl have been searching for offsets to pay for their tax cut, as if there aren’t a host of better things that we could do with $60-$80 billion. And judging by a quote she gave to The Hill, Lincoln either isn’t entirely clear how the estate tax works or is relying on a false characterization of it to build support:

I don’t think there’s any American out there who believes you should work all of your life to find that when you die, 55 percent of [your estate] has got to go to the government,” the senator said. “Coming up with more balanced exemptions and rates is critical.”

Lincoln is likely right that Americans don’t think 55 percent of any estate should go to the government upon the owner’s death. Fortunately, that is not a policy that anyone is proposing, nor would it be the case if the estate tax was simply allowed to reset to 2001 levels (as it will if Congress fails to act).

Because the estate tax — like the personal income tax — is calculated on marginal income, the particular percentage is only levied on amounts above the exemption. So if the exemption is $3.5 million, the first $3.5 million of the estate is passed on entirely tax free. Tax is only paid on the first dollar in excess of that. So an estate worth $3,500,001 would have a tax bill of .45 cents under 2009 law.

The effective tax rate — the amount paid as a percentage of the entire estate — owed by people who actually had to pay any estate tax at all in 2009 was about 14 percent. There were no grieving widows who have to hand over half of everything they own to the government.

Lincoln also employed the common conservative argument that “small businesses don’t have the profit margins to survive” a higher estate tax. But virtually no small businesses face the estate tax. In fact, 98 percent of estates pay no estate tax at all (because they don’t come even close to exceeding the exemption). Only 0.2 percent of the money that Lincoln and Kyl want to spend on their tax cut will wind up with actual small businesses. The rest will go towards lowering tax bills for the richest of the rich.