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Last Updated: Friday, 9 June 2006, 10:25 GMT 11:25 UK
Drive to kill US estate tax fails
Disappointed US senates speaking to the press after the vote
Both sides have now hinted at a new compromise
Republican senators have failed to secure enough votes to back a bill that would have permanently repealed estate taxes in the US.

The Senate voted 57-41 in favour of the measure, three short of the 60 needed for the bill - which has the support of President George W Bush - to advance.

Estate taxes are dubbed an unfair "death tax" by Republicans.

Democrats counter that the tax is fair and that a repeal would cost $1 trillion (542bn) over 10 years.

The issue of tax cuts and budget deficits is likely to play a key role in the mid-term elections which take place in November, and which could lead to the Republicans losing control of Congress.

Compromise mood

With mid-term elections looming, both sides are digging in their heels, making a compromise proposal less likely.

But Senator Jon Kyl, an Arizona Republican and leading advocate for repeal, said Republicans were now planning to offer a substitute measure that would exempt an individual's first $5m from taxation.

Under existing US tax law, introduced as part of George W Bush's 2001 tax cuts, estate tax is being temporarily phased out.

At present, the first $2m of an individual's estate, and $4m for a married couple is exempt, and the rest is taxed at 46%.

By 2009 the exemptions will increase to $3.5m for an individual and $7m for a couple, with the tax rate for the remainder falling to 45%.

A total repeal will then come into effect for just one year in 2010.

In 2011 the tax will return for estates valued over $1m, and the top tax rate will revert to 55%.

Estate tax is known as inheritance tax in the UK.

Political motives

The move to repeal the estate tax was prominently backed by Senator Bill Frist, the leader of the Republican Party in the Senate, who is standing down in order to concentrate on his bid for the 2008 Presidential nomination.

He is hoping his forthright stance will boost his chances with grass-roots Republicans, especially the self-employed businessmen who have been the strongest lobby group in favour of the tax change.

Democrats are hoping that their stance on the estate tax repeal, which would benefit only the richest 2% of the population, will provide evidence for their argument that the Bush tax cuts have not benefited the middle class.

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