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Last I heard,  the cost of the new health care bill is projected to be close to $1,000,000,000,000 (that’s a trillion). The wars in Afghanistan and Iraq, just this year, another $617,000,000,000 (billion) and the US National Debt has skyrocketed to an almost incomprehensible $12,000,000,000,000 (trillion), that’s over $110,000 per taxpayer. But wait – there’s more;  years of raiding the Social Security and Medicare coffers instead of segregating the monies, has left us and our children with an unfunded liability of, brace yourself, $120,000,000,000  –  that’s  $120 trillion. When are these hens coming home to roost?

The Senate could have easily followed the House’s lead in making permanent the current estate and gift tax rates. Instead,  the Senate opted  for prescribed chaos.  With your legacy in hand, and your children’s possible inheritance at stake, the Senate fumbled, in shaping the wealth transfer tax system – again.

Not long ago (though the last year the Mets won the World Series), the estate and gift tax system was easy to understand, though onerous. Upon one’s demise, the first $600,000 was exempt from the 55% estate tax, but every dollar thereafter not passing for the benefit of a spouse ¬- bang ¬- subject to estate tax. The tax was brutal, and with prosperity in the air during the Clinton administration The Tax Payer Relief Act of 1997 softened the estate tax bite by increasing the exemption from $600,000 to $1,000,000.

Tax attorneys, financial planners, accountants, bankers, financial planners, and those knowingly affected by the estate tax,  almost universally shrugged off the likelihood of estate tax repeal on December 31, 2009.  Their reasoning was sound   – the Treasury needs predictable revenue, taxpayers need clarity so reason would prevail.    But, reason didn’t prevail. The Senate didn’t act. Instead,  estate tax has been repealed, gift taxation remains in effect plus, we  now have a new  capital gains tax that provides a spouse of a decedent with a $3,000,000 basis step-up, and other heirs another $1,300,000 basis step-up.  No gains – no tax. Gains,  but no sales – no tax. Gains of $4,300,000 and a sale by spouse and heirs -   no tax.  Congress actually tried a similar system in 1977 -  it was deemed a disaster and quickly abolished. Why?  In part,  because few individuals actually know the basis of their assets. Ask yourself, what’s the basis of your home, mutual funds, stocks, dividend reinvestment plans or art collections and perhaps you wouldn’t be surprised to learn – you’re not alone, few truly know. Next problem, if you’re wearing the hat of the Treasury and you’re trying to predict revenue from capital gains tax – you’ve got a tough assignment. You’d have to predict;  a) how much gain is held, b) how much of the gain will be sold and recognized each year,  c) how much would be offset by losses and d) how much would be stepped up at death.

Why should Americans hard earned family wealth be subjected to such volatile and unpredictable swings? From a macro policy point of view, the Treasury is no better off. The days of relative peace and budget surpluses are long gone. War and budget deficits necessitate predictable revenue to offset spending or to service debt, and taxpayers demand clarity and reasonability.  We elected our representatives to deliver bipartisan, practical legislation in a challenging economic environment.  Sure enough, on December 3rd, the House of Representatives passed a measure known as HR 4154 making the $3.5 million dollar exemption permanent and locking in the 45% rate of tax. Finally, some certainty.  The fly in the ointment is that we needed the Senate, to follow their lead. To be sure, the estate tax isn’t perfect, some reform is needed and healthy debate merited.  But for now, some certainty with reasonable parameters would be acceptable to most .  To quote my mother, “is that too much to ask”?

But our Senators, dead locked in partisan politics and worried about the next election, didn’t take action. Instead, the Senate allowed our estate and gift tax system to fall into the abyss of confusion, conjecture and chaos.  Several Senators promise retroactive estate tax legislation sometime in 2010. However, until such time, the Treasury is losing revenue and taxpayers are left dangling,  And back in D.C., Congress has raised our nations debt ceiling  – again.   I have to go feed the hens.

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