“Death Tax” Dead, But Not For Long

Back in 2001, New York Times columnist Paul Krugman suggested that the Bush tax cut package should perhaps have been called the Throw Momma From the Train Act because it phased out the estate tax, ending with a total repeal this year.

But only for this year. If your multi-millionaire mom dies before New Year’s Day, you’ll inherit everything she left you tax-free, unless you live in the District of Columbia or one of the 18 states that collects an estate or inheritance tax applicable to descendants.

If you wait till next year to throw her from the train, you’ll owe the fed a top 55% tax rate on the total value of her estate over $1 million — assuming that Congress lets the Bush tax cuts expire.

But it won’t. So no reason to take your momma on a train ride.

Deficit hawks may choke at the budgetary impacts of extending unemployment benefits, COBRA health insurance subsidies and the higher federal match on state Medicaid costs. But I doubt they’ll grab the chance to add billions a year to the federal treasury by letting the estate tax revert to its pre-Bush level.

Nor apparently will more moderate factions in Congress. The starting point for the debate seems to be President Obama’s proposal to make the 2009 stage of the phase-out permanent. This would essentially give a lot of potential revenues to the heirs of quite wealthy people.

Specifically, the first $3.5 million of an estate left by an individual and the first $7 million left by a couple would be exempt from the tax. Assets above these amounts would be taxable up to a top rate of 45%. The Tax Policy Center says these rules would reduce federal revenues by $234 billion over the first 10 years.

I’ve asked myself why Obama would embrace such a large tax giveaway. Sure, he promised not to raise taxes on the middle class. But people with $3.5 million in assets aren’t, to my mind, middle class folks.

Perhaps he figured he’d got enough fights on his hands — health care reform, reform of the financial system, meaningful climate change legislation, etc. But it won’t be easy to get the 2009 estate tax reinstated.

Senator Jon Kyl (R-AZ) plans again to push for the bigger tax giveaway that he and Senate Blanche Lincoln (D-AZ) proposed last year. They want to raise the exemptions to $5 million for an individual and $10 million for a couple, while also dropping the top tax rate to 35%.

Senator Charles Grassley (R-IA) is all for this “bipartisan compromise.” And he’s got company on both sides of the Hill.

Senator Kyl has reportedly said that the plan would be “almost as good as full repeal” of the estate tax. And indeed it would. Last year, the Tax Policy Center figured that only 0.3% of estates would owe any tax in 2011 if the President’s proposal were adopted. The Kyl/Lincoln proposal, it said, would cut the number by almost half.

Wonk Room blogger Pat Garafalo reports that Senator Kyl will try to attach the proposal to a small business bill that may come up for a vote in a couple of weeks.

But first Kyl’s got to find an offset for the extra $80 billion or so it will cost. Remember, this is not the total cost — only the projected additional cost as compared to the President’s proposal and only for the first 10 years.

In May, Kyl told reporters that he’d pretty well figured out the pay-for. He and some other leading estate tax opponents in the Senate had come up with a couple of gimmicks that would mask the actual costs. The coalition has fallen apart. Hard to know whether this means the gimmicks have been shelved.

Another clever idea that’s been floated would allow people to prepay their estate tax. No details here, but the bottom line is that it would improve the 10-year cost score by forfeiting tens of billions later.

But say that Senator Kyl and colleagues came up with an offset that wasn’t just smoke and mirrors. Why should Congress be giving away billions more to the wealthiest fraction of Americans?

Is there nothing better to do with the money? Do we or don’t we have a long-term deficit problem?

3 Responses to “Death Tax” Dead, But Not For Long

  1. Yea, the author of this blog has certainly lost readers here. A brief one or two sentence summary would help the reader understand better what is going on with this death tax bill. But perhaps, that’s just what congress wants, to confuse the matter before the eyes and understanding of the people. I am running for congress to clarify issues and to not tuck in some rule to something unrelated to something else. It is about time, middle and low income Americans had a break from the smoke and mirrors, from unemployment woes, and from bearing the responsibility of the deficit on their own backs.

  2. I almost certainly would not have contemplated this was valuable two or three months ago, yet it is fascinating how age evolves the way you respond to stuff, many thanks for the post it absolutely is pleasing to see anything wise here and there as opposed to the usual rubbish disguised as blogs and forums over the web. Cheers

  3. […] Brighter Idea For The Estate Tax While Senator Jon Kyl (R-AZ) is leading the charge for a smaller estate tax, five liberal Senators have come up with a more progressive […]

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