“Death Tax” Dead, But Not For Long

July 19, 2010

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?


Senate Plans Benefit Increase for the Very Rich

April 16, 2009

Here we are in the midst of the worst economic downturn since the Great Depression. The New York Times reports more distressing stories about state cutbacks in life-saving social services. And we know they’re only the tip of the iceberg.

Meanwhile, the unemployment rate continues to rise. It reached 8.5% in March. That’s 13.2 million people unemployed and looking for work. Another 85,000 had looked and given up because they believe it’s futile.

So what should the federal government do? The Senate has decided that part of the answer is to make changes in the estate tax so that the very wealthiest individuals can pass on more of their assets to their heirs.

According to the Tax Policy Center, this initiative would give a further tax break to the wealthiest 0.25% of estates. If the current exemption is extended, as the President’s budget proposes, the other 99.75% would owe no tax at all.

The Center on Budget and Policy Priorities estimates the cost of this benefit for the very rich at $91 billion during the first 10 years. This is on top of the cost that will be incurred under the President’s proposal.

The so-called “death tax” reform enacted during the Bush administration was one of the bigger bills of goods sold to the American public. We heard then about all the small businesses and family farms that had to be liquidated to pay the tax. We’re hearing about them again.

For example, Senator Jon Kyl, co-sponsor of the Senate’s estate tax give-away tells us that small business owners can’t afford to pay an attorney or an accountant for estate planning services (or, I guess, insurance). Thus, he says, they’ll have to pay “more than half the value of their businesses to the government when they die.”

This is good political rhetoric but very bad economics. The Congressional Budget Office crunched the numbers a couple of years ago. It concluded that virtually all of the very few farms and small businesses that would owe any tax under the current exemption had enough in bank accounts, investments and other liquid assets to pay it. The rest could extend payments over 14 years.

The bottom line is that expansion of the already-generous estate tax exemption would pave the way for even greater long-term deficits. And when the day of reckoning comes, what programs will be most vulnerable to cutbacks? We have enough experience to know the answer.

Or look at it another way. What would $91 billion mean to people who don’t have enough for food, housing, health care or services that would enable them to live safely in their homes?