Estate Tax: The Senate Does the Right Thing Rejecting Kyl and Nelson Amendments

For years now, right-wing organizations have pushed estate tax repeal to ordinary Americans, making them think that little guys, family farms and disabled children's futures are hurt by an evil estate tax bite.  See, e.g., this Center for Media and Democracy report on a deceptive conservative PR effort to suggest that ordinary citizens with disabled children couldn't leave their estate to take care of their children.  Now, many Americans are finally awakening to the fact that estate tax repeal is candy that is custom designed only for the very very rich.  Nobody in the middle class pays the federal estate tax.  But the estates of multimillionaires like Vice president Dick Cheney or Big Oil tycoon Lee Raymond would save millions if the estate tax were repealed.  See  op-ed by Harold Myerson, Washington Post.  And although proponents of repeal claim it is a pro-growth measure, the Center for Budget and Policy Priority notes that repeal would decrease national savings. 

Last fall (before the election that changed the face of Congress), the friends of billionaires in Congress who want to eliminate the estate tax thought they'd found a way--holding the barely employed poor hostage to the super-wealthy by attaching estate tax repeal to the much needed bill to raise the minimum wage.  See Charles Babington, GOP Bid on Wages, Estate Tax is Blocked, Washington Post, August 2006. 

Aside:  For a good critique of the "logic" behind even more tax breaks to business to "pay for" a minimum wage increase, read Steven Pearlstein, Minimum Wage, Maximum Myth, Washington Post, Jan. 7, 2007.  Among the myths he exposes is the following:

"During the last decade, when inflation-adjusted pay of minimum-wage workers was declining, tax rates for small businesses were also declining, thanks largely to the Bush cuts. If it is now imperative to reduce business taxes when the pay of minimum-wage workers is rising, you have to wonder if there will ever be a time when the small-business lobby thinks it doesn't deserve a tax cut." Id.

The failure of one attempt to eliminate the estate tax doesn't mean the friends of the ultra-wealthy gave up.  in the new Congress, Senator Jon Kyl (R-AZ) again proposed a "reform" intended to further the goal of eliminating the estate tax--a $5 million individual exemption amount ($10 million couple), indexed for inflation, and at a tax rate no more than 35 percent.  The Senate, thank goodness, rejected that amendment (and a similar one put forward by Ben Nelson (D-FL)) yesterday, along with a proposal  by Jim deMint for outright repeal.  See this posting on OMB Watch.  Progressives everywhere should write their Senators and thank them for holding firm against these attempts to raid the Treasury in favor of the ultra rich.

Of course, there is one not-so-bright note.  The Baucus amendment to permanently extend the 2009 estate tax provisions--a $3.5 million exemption ($7 million per couple) and a 45 percent rate--was approved by the Senate.  That is both too high (the exemption amount) and too low (the rate), but it is better than the Kyl and Nelson amendments.

Comments

[ms]

Since you support progressive taxation and wealth redistribution, would you be kind enough to also lobby among your professional colleagues to redistribute your law school GPAs to those who are in law school? For that matter, any honors or accolades that you and your colleagues have earned incident to your academic endeavors in law school? For that matter, all of us would appreciate a redistribution of your scores on the Bar! Certainly you have no objections to the redistribution of this wealth. You no longer have need for any of it, and those of us who are truly in need would surely welcome it.

[Worker]

Any tax exceeding 50% (as the estate tax is with the state level add-ons) is immoral. All means of evasion and avoidance are justified.

[LindaMBeale]

You make an absolute statement apparently without understanding that context matters. There are two important contextual points here.

First, the estate tax has a large exempt amount. The part of the estate that is subject to tax at the "high" statutory rate is very, very small for all but about 2 out of 100 estates. For example, if you had an estate worth $2.5 million dollars when you died and the estate tax was a tax at 50% on the amount of the estate above an exempt amount of $2.5 million dollars, the effective rate you would actually pay would be 0%. If you had an estate of $2.5 million and the exempt amount was $2 million, you'd pay only 250,000, for an effective rate of only 10%. In fact, under our current system, the highest effective estate tax rate is ONLY about 14% when the statutory rate is around 50%.

Second, an estate tax taxes what's left after someone dies--many of the reservations we might have about very high taxation rates are inapplicable in this context for various reasons. For example, the accumulation within an estate has often never have been taxed during the life of the deceased. Since those with big estates own most of the financial assets of the country, they will almost always have very highly appreciated financial assets that haven't been sold so the huge gains would never have been realized and taxed during that person's lifetime, with the result that a 50% rate is actually quite reasonable. Contrast that with workers who are taxed by withholding on their wages IN EVERY PAYCHECK--no opportunities for deferment such as those with financial assets enjoy and no opportunities for tax free treatment of their wage income. Without a hefty estate tax, we permit a very few people who were born into wealth to accumulate even more wealth. It erodes every value we treasure in a democracy, and makes democracy itself very hard to sustain.

[JD]

People can have differing opinions on the morality of the death tax. You favor seizing up to half of a persons life assets because they die. I feel that if you earn money and pay taxes that what you accumulate and save should be yours to do whatever you want - including leaving it to the charity of your choice when you die.

Where I think you are way off base though, is the way you justify the tax because it has come from a lifetime of assetts that have been allowed to grow without taxation. You are simply wrong.

Iam 72 years old, have lymphoma and have a net worth of close to 26 million dollars. How did I achieve this? Well...I inherited a good deal of it. When my parents died their estate was taxed at nearly 50%. The remaining 50% went to my sister and myself. Money that was invested....money that I paid tax on EACH and EVERY year. How dare you suggest that that money has escaped taxes. About half of my net worth is attributed to my inherited wealth. The other half has been through my own resources....careful investing, hard work and some luck. But I have paid taxes on ALL of....either simple income or capital gains....on ALL of it!

Your philosophy is that the act of dying is a taxable event. If I never died.....then you would be satisfied that I have paid my fair share of taxes. But the act of my dying is "just" cause to force me to forfeit half the wealth I have earned over my lifetime....wealth that has ALREADY BEEN TAXED!!. How do you morally support that? "You don't need it anymore.....so we'll just take it?" - Is that about the size of it?? I would love to hear the moral argument here. Does it basically come down to your opposition "family money"? That the kids of wealthy people should not benifit? What about my wishes?? Should they not be honored?? Again we are talking about MY MONEY. Not yours, not the governmets. You seem to feel that half the money I have accumulated is really just on loan to me from the government while Iam alive - and that the government has claim to it the second I die. Again this money has been taxed already. You want to tax it again when I die. Do you not agree that this is a "death tax"?

The other thing that really bothers me about this tax law.... I have cancer. I hope to beat it but frankly few people do. The estate tax goes away in 2010 and comes back in 2011. So Iam trying to make it to 2010 and die before 2011. Iam curious as to what you do if you were in my position. If its December 2010 and you're dying with 2 months to live - and the difference of a month can mean either paying zero death tax or having half your lifes assetts wiped out... What would you do? What do you suggest ? How can one effectively do any estate planning with this debacle?
The tax law that you applaud the Senate for keeping is the same one that puts me and thousands of other Americans into the awkward position of wanting to live ... but choosing to die in 2010. You're going to see a spike of suicides. Do you really support a law that encourages such a horrible choice? Do you think that such a law is a moral?

[mark maison]

The author here gives statistics to reassure people that the estate tax will only effect a small portion of people. And those that are effected only pay a small percentage. I don't understand how the government has any claim to money that it has already collected taxes on. Isn't that "double dipping" As far as the argument that only the rich will pay the estate tax - why is that fair? If there is going to be a death tax, should everyone have to pay the same proportion? If its logical to tax someone because of their death, then why include some and exclude others? Isn't this arbitrary? The author seems to be saying "We know its unfair to do this, but since its only the top 2% that are effected - don't worry about it".

[LindaMBeale]

au contraire. The author is NOT saying that "we know it is unfair"--in fact, the author is saying that it is unfair NOT to do this.

First, in many cases, the government has not already collected taxes on estates--what is taxed is appreciation that has not be "realized" and thus is not subject to the income tax.

Second, the estate tax is not the same as the income tax. Like the gift tax, it is a different system.

Third, from a fairness perspective, death is an ideal time to tax the build-up of wealth that passes to a beneficiary. There are similar reasons for exemptions in this context, to protect those at the lower end of the income distribution, as in the income tax context. For example, a daughter who lives with her mother and would otherwise have to sell the family home, or a disabled child for whom the estate will provide after the owner's death. Having the tax fall only on estates beyond what is determined is a reasonable exemption is fair because (1) those are the estates that generally can and do escape tax most thoroughly during life and upon death by tax planning and (2) those are the estates that can most easily pay under the fairness principle of 'ability to pay'.

The question of whether the estate tax should apply to an even larger group than the pre-2001 version is worth considering, but the issue at stake here is the different one of whether it should be eliminated or not. The author is arguing for a lower exemption and higher rate of tax than that proposed by many who want to "reform" the estate tax as an option to eliminating it (but resulting in very few estates being taxed) and against the elimination of the estate tax.

[LindaMBeale]

As for JD's lament about the timing of the change in the estate tax: I agree wholeheartedly that the "phase-it-down, eliminate it, and then having it spring back" approach to estate tax "reform" enacted by the Bush Congress of 2001 is unabashed politics at its worst. Congress was pretending to enact a revenue reduction that was less draconian than that particular Congress intended it to be, since the aim was clearly to make the elimination permanent after a few years. That kind of tax legislation is harmful to business and harmful to individuals, because it makes planning difficult and in fact research shows that many events take place around the time of legal changes, showing that there is at least a short-term incentive for behaviors that are favored (or disfavored) under the approaching change. Except for provisions intended to act as short-term incentives, Congress generally shouldn't legislate with these types of "sunsets".

But that issue is really a side issue as to whether the estate tax should be retained or not.

[John Daley]

Linda - I disagree with your premise that wealth accumulated has gone untaxed. You seem to rationalize the death tax because this is money that has escaped taxation because it has either been paid at the capital gains rate or just appreciated.

So let's be clear. I want to fully understand your point - so please indulge this hypothetical so all your readers can fully understand you.

If an individual was very highly paid....lets say he earned 1 million per year his whole career. On that income he paid straight income tax each and every year. After he paid his taxes each year he took the balance of what was left over in cash and stuck it under his mattress. After 30 years his kids find him dead in bed - after they remove his body they find all of the post tax money he saved in his career - call it 20 million. Are you suggesting that the government has a right to any of this money? If so, how much of this money should the government be entitled to take? And why should the be entitled to any of it?