George Steinbrenner’s well-timed death — though I suspect he may not have seen it that way — points up the insanity of the current estate tax situation. As you may have heard, the billionaire Yankees owner could end up owing no federal estate tax — because there is no federal estate tax this year.

Last year, Steinbrenner’s heirs would have faced a tax rate of 45 percent on the bulk of his estate. Next year, the tax is set to spring back to a 55 percent rate. Congress is not going to let this happen — but it is also unlikely to do away with the estate tax altogether.

Hence the good timing of Steinbrenner and three fellow billionaires who have died this year. You know there is something very wrong with the tax code when you have estate planners saying things like “if you’re super-wealthy, it’s a good year to die,” as BDO Seidman’s Jack Nuckolls told The Associated Press. The AP put Steinbrenner’s savings in the neighborhood of $500 million.

Congress set the estate tax to disappear in 2010 and be, pardon the phrase, brought back to life in 2011. No one expected this throw-Mama-from-the-train scenario to actually play out in 2010, but Congress has been unable to agree on a reasonable level for a new estate tax.

It’s possible an estate tax will be reinstated this year and applied retroactively, but there are a lot of law firms looking forward to billing for years of litigation over whether this is constitutional. Short answer: It is, but when has that ever stopped lawyers from arguing?

The estate tax situation is even more messed up than it appears. While the heirs of the super-rich reap a windfall and the Treasury loses badly needed revenue, some heirs of the not-so-super-rich are actually facing higher tax bills because, due to an accompanying change in the law, they have to pay capital gains on property that would otherwise have been able to pass tax-free.

The notion of repealing the so-called “death tax” was wrong at a time of supposed budget surplus and is particularly irresponsible now. Even beyond bringing in needed revenue, the estate tax serves an important function.

As Michael J. Graetz and Ian Shapiro write in “Death by a Thousand Cuts,” about the movement to repeal the estate tax, “For almost a century, the estate tax affected only the richest 1 or 2 percent of citizens, encouraged charity, and placed no burden on the vast majority of Americans. This tax was grounded on a core American value: that all people should have an equal opportunity to pursue their economic dreams.” The only thing wrong with this account is that it overstates the bite of the modern estate tax, which applied to only two of every 1,000 estates in 2009.

The Obama administration has proposed renewing the estate tax at its 2009 level: 45 percent, with the first $3.5 million of an individual estate, or $7 million per couple, transferred tax-free. The House passed such a measure last year. That is more than adequate to protect against the supposed threat posed by the estate tax to family farms and other small businesses. If anything, this is too generous: It would cost about $250 billion over the next decade, compared to current law.

Not generous enough, though, for Sens. Jon Kyl, R-Ariz., and Blanche Lincoln, D-Ark., who are pressing for a $10-million-per-couple exemption and 35 percent rate — although they hide the true long-term cost of this proposal by having it gradually phased in.

The latest bad idea, proposed by Rep. Mike Thompson, D-Calif., is an unlimited exemption from the estate tax for farms. This is unnecessary because very few family farms are large enough to be affected by the estate tax — the Tax Policy Center estimates fewer than 110 next year if the tax were reinstated at its previous level.

This exemption is unwise because it would simply incentivize super-rich non-farmers to transfer their wealth to farmland and, as the Tax Policy Center concluded, “make the estate tax essentially voluntary for the very wealthy.” It would actually hurt family farmers by driving up the price of agricultural land.

So maybe Steinbrenner’s timely death can serve as a wake-up call uniting Yankees fans and Yankees haters alike. Resurrect the estate tax.

Ruth Marcus’ e-mail address is marcusr(at symbol)

© 2010, Washington Post Writers Group

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