Estate tax legislation was first passed in 1916 as a response to the excesses of the Gilded Age. The objective was to shift the tax burden from the Midwestern and Southern states to the rich Northeastern states. The tax burden in those days was mainly in the form of tariff duties and excise taxes. The legislation was recognition that democracy was at risk if too much wealth and power was concentrated in the hands of a few.

One cannot deny the contribution of estate tax to the progressivity of the tax system. The estate tax is the most progressive of any of the federal taxes. The main objective of estate tax is to reduce inequality of wealth and income. It basically applies only to the rich.

Only the super rich stand to benefit from the repealing of estate tax. Without estate tax, billions of dollars in revenue would be lost. The revenue loss over the next decade could be over a trillion dollars. This, at a time of record deficit, could impose an unconscionable burden on future generations. The trade deficit is at a historic high of $61 billion and growing. There are no plans or methods to repay it. This can plunge the U.S. into a drastic economic depression at any time. To make up for this, the government will have to increase taxation or cut Social Security, Medicare, environmental protection and many other government programs which are essential for the overall development of the nation. Any cut or decrease in these programs would be unfair and life-changing to middle class Americans and to the needy, children, elderly, and disabled.

Estate tax also encourages contributions to charity. The present system of estate tax afford the affluent a way of reducing the size of their estates by making contributions to charity. In fact the system operates as an incentive to contribute to charity.

Opponents of the estate tax system harp that it has led to many middle-class Americans losing their estate because of the taxes owed. This has been proved wrong by a study conducted by an organization called United for a Fair Economy. When the exemption increases to $3.5 million in 2009, the share of estates taxed will be about 0.16%. Rest of the estates will pass to the heirs tax free.

Another favorite argument of the critics is that estate tax is a form of double taxation – the estate holder has already paid income taxes and property taxes. Estate tax is not a tax on the estate-holder. It is a tax on the heirs who inherit the estate as an unearned gift.

Repealing of the estate tax will only benefit the rich. Middle class Americans will end up paying more taxes to make up for the revenue deficit.

The banks actually competed with one another to dream up complex transactions for foreign hedge funds to avoid taxes. The probe also found that some of the internal communications show that the bank officials were concerned that they could run into trouble with the Internal Revenue Service (IRS).

The results of the probe clearly highlight the failure of the IRS and Treasury Department to enforce the law. The banks entered into agreements to give the hedge funds the economic value of dividends, without actually triggering a withholding tax on dividend payments. The foreign hedge funds would sell their stock to an U.S. investment bank just before a dividend was to be paid and simultaneously enter into a swap arrangement with that bank to retain the economics of stock ownership. The U.S. bank paid the foreign hedge fund a dividend equivalent but did not withhold any taxes. The funds technically didn’t own the shares. A few days later, the hedge funds would repurchase the stock from the U.S. bank.

The $32 billion special dividend by Microsoft in 2004 is said to be the trigger that spurred the investment banks and brokerage firms to sell products that would allow their hedge fund clients to avoid paying the associated taxes.

The investigation had some effect. Merrill Lynch & Co stopped doing some of the deals after the committee began its investigation although the investment bank claimed that it acted in good faith when it advised its clients – foreign hedge funds – and it acted appropriately under existing tax law. Citigroup voluntarily approached the IRS and paid $24 million in withholding taxes after an internal audit.

One of the beneficiaries of such transactions – Maverick Capital Management – estimated that such deals helped it avoid $95 million in taxes over an eight-year period.

The result of the probe raises one very important question – where does the loyalty of these investment banks and brokerage firms lie? They are American companies who have reaped all the benefits of being American companies. They have openly helped foreign hedge funds flout U.S. tax laws. Is there something called patriotism or is it profit at any cost?

So, somewhere between $250,000 and $5 million is an imaginary line drawn in the economic sand that separates the middle class from the flat-out wealthy.

The million dollar question is, precisely where is that line located?

Newsweek columnist Dan Gross points out in an engaging column on the topic that an informal poll conducted by CNBC found that only 35% of the people making over $250,000 a year considered themselves rich, even though the median household income as of 2007 was only $50,233. Only the top 1.2% of U.S. households report incomes of $250,000 or better, and only 20% of all U.S. households report household incomes greater than $100,000. In some states, such as Mississippi, the median annual household income is closer to $36,000. That means in Mississippi, half of all household incomes reported are lower than that.

Statistically speaking, these figures suggest “middle class” technically ends just shy of $100,000 per year per household, with some leeway this way or that depending on the specific state. This also feels intuitively right to me, speaking as a person who has for the past five years lived right in that income ballpark. Most of the working people I know in West Michigan have an annual household income in the $40,000 to $80,000 range, and most of the people who make more than that are people that we (at the lower income level) would consider rich.

But statistics and emotions are two very different things. In some of the priciest cities in the nation, a household income of $250,000 will not buy you a home in a really nice neighborhood. That’s obscene, but we have to ask ourselves if that fact alone means that a household placed squarely in the top 1.2% of all working American households is really experiencing the kind of distress that warrants tax relief. Certainly the family that can’t buy the house they want would say yes. And yet, a family in Mississippi getting by on $20,000 each year would say, “Give us a break.”

I recall as a child assuming my family was more or less “middle class.” My father was the sole breadwinner for a family of four kids and my stay-at-home mother. We had a small house in a city neighborhood inhabited mostly by factory workers.

By the time I entered high school I’d become painfully aware of an entire income class several rungs above us; the families of attorneys, dentists, accountants, and other white collar workers. These families also considered themselves to be “middle class.” Their lifestyle was so much more upscale, their problems so seemingly high-class (from my vantage point as a teenager in hand-me-downs), that I started to refer to our family as “lower middle class” or “working class.”

The blue collar/white collar distinction became a big deal in high school and an even bigger deal in college, where my blue collar roots branded me an interloper on campus and a traitor inside my old neighborhood: the worst of both worlds. It seemed to me that the fight over ownership of the middle class label was being won by white collar workers, with blue collar families by that time widely seen as uneducated and slightly more brutish by nature.

That was 35 years ago. Now, my husband and I have three jobs between us and worry about our health and our retirement. We seem to work all the time, and we’ve already accepted that we likely will never retire. We won’t be able to afford it, even though we’ve worked for our entire lives. A single healthcare crisis could sink us in a very short time, even though we both have insurance through our jobs. (We are still paying off about $7,000 in medical debt accrued for three days in a hospital over a year ago. That was what was left after insurance, for only three days’ admission.)

Our combined income is greater than $50,000 but nowhere near $100,000, and we do not look or feel rich. We feel stressed. We feel worried. We feel tired. Most people, looking at his truck-driving job and my entry level clerical job and freelance moonlighting work, would consider us “working class” even though we are both educated. The jobs we have are the jobs we have been able to get in the area in which we live. I worked my way through college (twice), and my kids had to do that, too.

Looking at the world today, it does seem to me that 1.2% of the population has successfully co-opted the “middle class” label. What’s more, the middle class label seems to me to have been floating upward for nearly forty years now, and if it floats any higher, it will turn in on itself, and we will all be living in some absurd economic farce. Perhaps that is how we are living now, and I just tire of thinking about it.

Whatever your feelings, whatever number you personally would choose to define the folks in the middle, it’s a pretty good bet you will include yourself in the category, and that you will feel strongly that you deserve more tax breaks. That much we know for certain.

But $5 million? How many houses does McCain own?

In BB&T vs. United States of America, the Court held that to have a tax deduction for lease or interest expense, you must actually incur them. And to incur them, you must have a genuine lease and genuine indebtedness.

In AWG Leasing Trust vs. United States of America , a federal district court denied tax benefits to a U.S. partnership related to its alleged purchase of a German waste-to-energy facility as an abusive SILO transaction.

In Fifth Third Bancorp of W. Ohio vs. United States of America, a federal district court jury, applying the economic substance doctrine, denied tax benefits related to a bank’s leasing arrangement for passenger rail cars as an abusive LILO transaction.

LILO involved corporate leasing of infrastructure on paper only while SILO involved corporate sale on paper only. In both tax shelters, the infrastructure is leased back to the owners. LILO and SILO as tax shelters have been under scrutiny from lawmakers. In 2003, the Treasury and Senate Finance Committee held an investigation on these tax shelters.

The IRS has over the years been using various incentives to entice users of tax shelters to come forward. With the tax shelters becoming more sophisticated, the IRS had to spend time to figure out who is buying what and leasing what.

According to the IRS many companies including large banks had bought more than thousands of tax shelter to improperly defer taxes and bolster their balance sheets. Bolstered by this recent ruling, the IRS is now offering a chance to such companies a chance to settle. The settlement has five main features:

• The taxpayer must agree to concede 80 percent of any claimed interest expense deduction, amortized transaction costs, and head lease rent expense for each tax year through 2007
• The IRS agrees to disregard 80 percent of any reported taxable rental income with respect to SILO or LILO transactions for each tax year through 2007
• The taxpayer must agree to report in 2008, 80 percent of the original issue discount (OID) connected with the SILO or LILO transactions for each tax year through 2007
• The taxpayer must exercise best efforts to terminate its SILO or LILO transactions on or before December 31, 2008
• The taxpayer must agree to recognize as ordinary income any termination gain, whether realized under an actual or deemed termination.

Companies that do not accept this offer could end up fighting a loosing battle. With three court decisions in its favor, the IRS is having a strong hand.

With an average combined federal and state corporate tax rate of 39.3%, the United States has the second highest corporate tax rate in the world, next only to Japan. The corporate tax rate in the United States is even higher than socialist Sweden and welfare-states Germany and France. If the business is based in states like California, Iowa, New Jersey, or Pennsylvania which have high corporate tax rates, then the tax on business income is even higher than in Japan. Economists have long argued that this high rate of corporate taxation has made the United States uncompetitive, driving away capital. But the lawmakers in Washington, D.C., feel otherwise. A Government Accountability Office (GAO) study in 2005 came to the conclusion that almost 28% of the large American companies paid no tax that year.

Although the corporate tax rate is almost 39.3%, the share of corporate taxes in the Gross Domestic Product (GDP) is 2.5%. Ireland has a corporate tax rate of 12.5%, but the share of corporate taxes in its GDP is 3.4% – higher than the United States with its higher corporate tax rate.

The irony of the situation is that while the United States has the highest corporate rates, there are a lot of loopholes which favored businesses can use to avoid the high rates. The Tax Foundation looked at the 2005 GAO study and found that among the large companies that paid no taxes, 85% of them made no profits that year. The same year, two large companies – American Airlines and General Motors – used the loopholes and avoided paying taxes by reporting losses of $862 million and $10.5 billion. The loopholes also affect the economy adversely. Businesses spend millions of dollars to exploit these loopholes.

The United States taxes businesses on their worldwide income. This has important implications for American companies competing in foreign markets. Because of higher tax costs, American companies may lose foreign market share, generate lower returns for American shareholders, and hire fewer skilled workers in the United States.

In an effort to remain competitive, some American companies are changing their structure to become foreign-owned firms – the American company places itself under a new foreign parent company formed in a lower-tax jurisdiction. The firm still pays taxes to the U.S. government on all U.S. income, but it no longer pays U.S. tax on its income earned outside the U.S.

Other countries are cutting corporate tax rates because they’ve learned the importance of having a competitive tax climate. Countries cannot attract new business and job creation if their corporate income taxes are significantly higher than comparable nations. Most other major countries do not tax foreign business income as aggressively as the United States. In fact, most countries have “territorial” tax systems that tax businesses on domestic income only.

It’s time for the lawmakers in Washington to wake up and reform the tax code. In this ultra-competitive world, countries are going all out to woo businesses. The United States is becoming a less competitive place to do business. The inaction on the part of the lawmakers is only making it easier for other countries to woo American companies with lower tax rates.