Estate tax debate imminent in Congress

WASHINGTON (Reuters) - The joke among tax lobbyists in the nation's Capitol is that 2010 may be the best year for wealthy Americans to die -- at least from their heirs' point of view.

Federal estate taxes are due to go to zero next year under current law unless Congress acts.

The U.S. House of Representatives is expected to take up next week the thorny issue of how much federal tax should be levied on the estate of a rich citizen upon death.

At stake are billions of dollars in taxes the U.S. Treasury receives annually from the existing tax and the desire by wealthy Americans for certainty in planning how to dispose of their estates after death.

Current law exempts the first $3.5 million of an individual's estate, and then taxes the value above that at a maximum rate of 45 percent.

Unless Congress acts by year-end to renew the law, the tax disappears entirely for 2010 before reverting to an exemption for only the first $1 million of the estate with a top rate of 55 percent above that level.

"It comes roaring back for people who die in 2011," Alan Viard, a resident scholar at the conservative American Enterprise Institute told a forum earlier this week. "Some people joke about wealthy people being killed off by their heirs in 2010."

Tax analysts say a full agenda for Congress means that a one-year extension of the current policy is the simplest and most likely outcome for now.

House Democratic Leader Steny Hoyer said the estate tax could come to the House floor as early as next week.

Estate tax proponents say it helps smooth out vast transfers of wealth from inheritances which magnify economic disparities.

Critics contend the tax distorts investment and other choices of the rich, and also affects owners of small businesses and farms.

Conservative policy analysts say the estate tax should not be used for social engineering.

"If we think that society is not fair enough, going after that through the estate tax is something that will likely cause a good deal of harm," said Kevin Hassett, director of economic policy at the American Enterprise Institute.

Liberal-leaning experts say transfers of wealth via inheritance keeps those wealthy by birth at the top of the economic ladder. And businesses most affected by inheritance taxes are large multinationals, they say.

"When we're talking about the estate tax we're talking about the Wal-Mart Stores family, the Mars family. These are not small mom-and-pop businesses," said Lily Batchelder, a New York University public policy professor.

The Congressional Budget Office recently said it found "scant evidence" that the estate tax impedes the creation of small businesses.

The CBO's longer 2005 report on the issue said fewer than 2 percent of all estates have had to pay estate taxes. There was the potential that the estate tax could discourage individuals from investing, but CBO said a dearth of data prevented any clear conclusions.

Former President George W. Bush increased the estate tax exemption and lowered the rates under his tenure, and unsuccessfully tried to repeal it altogether. President Barack Obama supports an extension of the current policy.

(Reporting by Kim Dixon; Editing by Julie Vorman and Tim Dobbyn)