Death of the Death of the Death Tax

Half Sigma, in a rare break from PDS, alerts us to a possible compromise on the Estate Tax:

Obama plans to propose locking in the estate tax at the current year's levels: the first $3.5 million is exempt ($7 million for couples, and I'm not sure how that works), and after that there is a 45% tax.

This is far superior to the current law which has no estate tax at all in 2010, followed by a return to the 55% rate [with a $1M exemption - Φ].

To answer H.S.' question: the exemption is doubled by use of a device called a "living revocable trust". Let's consider a family with a net worth of $7M. Essentially, their common property is divided between the husband and wife by the terms of the trust. That way, both retain their separate $3.5M exemption. When the first of a couple dies, his half of the estate, $3.5M, is held in trust for the children pending the death of the other. In the mean time, she can draw on the income generated by the assets held in trust but may not directly dispose of it; this power rests with the trustees who, one hopes, are diligent in their duties.

On the substance, Obama's proposed compromise is probably close to the best possible deal. But I have to point out is that the debate thus far entirely misses the impact the estate tax structure has on large families. The exemption is constant regardless among how many heirs it is divided. If a couple has one heir, he gets the whole $7M, but if they have ten heirs, each only recieves $700K.

A viable Republican counter-offer would be to propose that each heir be exempted $7M, or some other amount perhaps. This would highlight the burden on large families, and may find in Obama a receptive consideration.

Also, why 45%? Why not tax the money at each heir's top marginal rate?

Also, can we get indexing? I predict that before this economic crisis is over, $7M will buy a lot less than it does now.

I will write my Congresscritter.