RPT-ANALYSIS-Democrats' discord undercuts Obama estate tax push

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* Rural-state Democrats differ with president on estate tax

* Clock ticking on tax's status as part of 'fiscal cliff'

* Farms, ranches at issue, but tax has much wider impact

WASHINGTON, Nov 30 (Reuters) - Divisions among Democrats are

undermining President Barack Obama's push to raise the U.S.

estate tax on inherited wealth, just weeks before the arrival

of the "fiscal cliff" could drive the present estate tax rate

even higher than Obama proposes.

Action on the estate tax could be postponed. But in his

successful re-election campaign, Obama called for wealthy

Americans to pay more in taxes - and it is overwhelmingly the

wealthy who pay the estate tax.

The outcome may hinge on whether Obama insists on his estate

tax proposal - or something close to it - as forcefully as he

has insisted on raising individual income tax rates for high

income-earners, or whether he lets the issue be put off.

If a single facet of the complicated partisan stand-off over

taxing the wealthy best captures Capitol Hill's fiscal gridlock,

it may be the estate tax - a long-standing and volatile issue -

that may finally be coming to a head.

"If you look at where the public is on tax issues compared

to the last time this was debated - it is night and day," said

Frank Clemente, campaign manager for left-leaning Americans for

Tax Fairness. "They are deep into this tax fairness position."

The "fiscal cliff" is a collection of federal tax increases

and automatic government spending cuts that, if allowed to take

effect as scheduled early in 2013, could push the U.S. economy

into recession, according to economists' forecasts.

Part of the picture is the estate tax.

Under laws signed a decade ago by former Republican

President George W. Bush, the estate tax is applied to inherited

assets at 35 percent after a $5 million exemption. That means a

deceased person can pass on an inheritance of up to $5 million

before any tax applies.

Inherited wealth passed to a spouse or a federally

recognized charity is generally not taxed.

Obama wants to raise the rate to 45 percent after a $3.5

million exemption. If the Bush rates are allowed to expire and

Congress does nothing, the rate will shoot up next year to the

pre-Bush levels of 55 percent after a $1 million exemption.


New York Senator Charles Schumer on Thursday said the

Democrats' proposal to avert the "fiscal cliff" involves $1

trillion in immediate deficit reduction that includes new

revenue from raising the estate tax to the level proposed by


No less a power broker than Democratic Senate Finance

Committee Chairman Max Baucus said this week, however, that he

wants to hold the estate tax steady at current rates.

Baucus is up for re-election in 2014 from Montana. He says

ranch and farm owners in his state would stand to lose if

federal taxes rose on passing property to heirs.

"Rural Montana is much different than urban America," Baucus

told Reuters in a brief interview in the U.S. Capitol.

He told a Montana newspaper on Sunday that he would even

support scrapping the estate tax altogether, as most Republicans

favor. A spokesman for Baucus - the Senate's top tax law writer

- said he will seek as much estate tax "relief" as he can get.

At least three other rural-state Democratic senators have

proposed extending current estate tax rates: Claire McCaskill of

Missouri, Jon Tester of Montana and Mark Pryor of Arkansas.

Spokesmen for Pryor and McCaskill said everything is on the

table as Congress struggles to deal with the "fiscal cliff."

But one thing is clear: the voice of farming lobbyists is

registering with Democrats on the volatile estate tax issue,

although it is only marginally about farms and ranches.


The estate tax's impact extends beyond farmers and ranchers.

It applies mostly to very wealthy Americans, whose taxes have

been specifically targeted for increase by a president whom

voters returned to the White House just three weeks ago

following a tough campaign in which taxes were a key topic.

Of the 3,600 estates subject to the estate tax this year,

only 100 are classified as farming estates, according to the

congressional Joint Committee on Taxation.

The wealthiest 10 percent of Americans pay nearly all of the

estate tax under current rates, according to the Tax Policy

Center, a non-partisan fiscal policy think tank.

The number of estates subject to the tax would double under

the plan proposed by Obama. About 300 farming estates would be

subject to the tax under Obama's terms, which would raise about

$100 billion in new revenue for the government over 10 years.

Republicans have benefited previously from Democratic

division over the tax. In July, Senate Democrats shelved a plan

to raise the estate tax with a symbolic extension of the Bush

tax rates for the middle-class.

A senior Senate Democratic aide said the tax was pulled from

the bill because Obama felt strongly about boosting the tax. It

is unclear how hard he will fight for his position this time.


The divide between the political parties over the tax is so

wide that they cannot even agree on a name for it. Democrats

call it the estate tax, as it is described in law.

Republicans, who generally want to repeal it, have another,

more provocative name. They call it the "death tax" and

characterize it as a penalty on being wealthy and successful.

First enacted nearly a century ago to combat the rise of

dynastic wealth and check income disparity, the estate tax is

the most progressive tax there is. That means it hits the

wealthy much more than lower income groups.

It was a Republican president, Teddy Roosevelt, that

proposed the first permanent inheritance tax, arguing that

inheritance of "enormous fortunes" does a society no good.

"No advantage comes either to the country as a whole or to

the individuals inheriting the money by permitting the

transmission in their entirety of the enormous fortunes which

would be affected by such a tax," Roosevelt said.

Another decade passed before it was adopted in 1916, partly

to fund World War I. The rate has waxed and waned, hitting a

high of 77 percent prior to World War II.

(Editing by Kevin Drawbaugh and Dan Grebler)

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