estate tax: why don't the Dems get it?

Charles Rangel has just announced (Oct 22, BNA Daily Tax RealTime) that he is putting together a draft of tax legislation that will make the current law on estate tax permanent--that's a law that provides a mere 45% flat rate on the taxable estate amount, which is the excess over the $3.5 million basic exemption (much more when you take various spousal items into account).  Remember that for an estate of $10 million left by both spouses, that's an effective tax rate of less than 14%!

According to Rangel, making the current amount permanent is a "high priority."   Why?  Interestingly, there's nothing in the BNA article on this announcement that gives any reason at all.

The cost would be $233.6 billion over ten years.

Let me repeat that--if we make the current estate tax rates/exemption amounts permanent instead of allowing the estate tax to lapse back to where it was before George W. Bush and the Republicans in control of Congress decided to cut taxes on the wealthy to "ensure growth", it will cost us about a quarter of a trillion dollars over the next ten years. 

This was a huge Republican priority since it is a bill that benefits ONLY the super rich who have estates worth more than $3.5 million.  The GOP wanted to kill the estate tax entirely, but opted for doing it in in bits and pieces.  They passed a bill that eliminated the estate tax gradually down to zero, then resurrected it from the dead back to its 2001 level in the next year.  That way, they pretended that they weren't really creating the gigantic deficit hole that they were really digging for us, because they counted all that income from the estate tax, back at the 2000 levels, in the "out" years.  Of course, they really intended to dig the huge deficit hole (remember that until the Democrats were in control and arguing for the need for deficit spending as a stimulus, there wasn't a tax cut-created deficit that the Republicans didn't like).  They just hoped they could fool most of the people for most of the time into thinking this was something reasonable and that it was something that ordinary Americans should care about.  Regretably, it works because many people who have no possibility of ever being subject to the federal estate tax are convinced that their small estates will be cleaned out by it. Clearly, the GOP  strategy was that once they had gotten the estate tax down to zero, all those folks that hadn't managed to die in that year would raise hell unless they kept it at zero from then on.  The Dems are clearly afraid to let the provision sunset under its own terms--they're too scared that the Republican strategy will successfully bite them when they let the estate tax come back in 2011, right as campaigning gets under way for the 2012 elections.   So they're conceding half a defeat up front by planning to make the Republican's weak estate tax law.

In case no one noticed, here are a few relevant facts:

1) our national debt is more than $11 trillion and climbing

2) our economy is mired in a Great Recession that is leaving more people permanently dismissed from their jobs than we've seen in similar situations before, while the bankers that caused the global mess are raking in huge rewards in a banking business that is very little banking and lots of speculative trading, and one that wouldn't exist without the Fed and the government guarantee underlying their business

3) the nation need sto spend money on some very important things, like health care for war veterans, infrastructure repairs, public transportation, basic research, education

4) the Bush tax cuts were enacted at the same time as the nation was led into a "war of choice" requiring huge  and ongoing expenditures and in the midst of a bubble economy for which a not-pleasant future could be predicted based on the early warning signs (Enron, Long Term Capital Holding, the frenzied growth in CDOs and credit default swaps) and which ultimately resulted in the Bush regime's multi-trillion-dollar bailout of the big investment banks and trillion-dollar deficits

As a consequence, the estate tax revenues really matter.  They are not insignificant, and they come from a reasonable source (estates with multi-millions of dollars, that will otherwise go to beneficiaries/heirs who have done nothing to earn the windfall).  We should not make the 2009 rates permanent.  We should instead treat the 45% rate as the minimum rate on the lower-value estates, and enact a progressive rate structure, such as a 55% rate for estates over $20 million, and a 60% rate for estates over $100 million (etc.).   We should lower the exemption level back down to $2 million--there is simply no reasonable justification for granting further tax largesse to huge estates. 

Of course, we really should undo most of the Bush-era tax cuts, reinstating the law as it was in 2000 before the Republican assault on the federal fisc in the name of promoting growth began.  The Bush tax policies, combined with the Bush deregulation regime, were a disaster.  They did not promote growth; in fact, they promoted speculative frenzies in risky investment and enormous losses sustained by the nation to make up for that risky behavior.  Ordinary workers' wages stagnated; only the rich got richer.  Read Economist's View, What's Good for Goldman Sachs is Good for Everyone (Oct. 21, 2009) to understand better the mentality that thought (thinks) tax cuts for the wealthy would be the way to prosperity.  The prosperity of the wealthy, yes.  But of ordinary Americans?  No way.  (Read the comment by Richard Serlin, an adjunct at the University of Arizona.  He adds some context to the WaPo article by Ezra Klein about the stagnation of incomes for the middle class.)

 

Comments

[Jack]

Linda,
Charlie has been squirreling away a lot of ill gotten gains over these many years. He seems to be increasingly less involved with his constituency, but that is to be expected given his long term in office hanging around the fat cats of DC. Maybe he sees his efforts on behalf of the well to do as a possible means to his own savior in front of a congressional ethics committee probe. Let us not forget that many Democrats voted in favor of the Bush tax cuts. When it comes to kissing the hands that provide financial support the Dems are little different from the Republicans.

[Gary]

Why should the government receive a person's assets upon his death? Most likely, they will merely pass it on to their friends (think Wall Street or defense contractors)or use it to kill innocent people in foreign lands.

The government has spent so much more than it can ever repay that there is no way to solve this problem by collecting taxes. IMO, it is more urgent that we begin to unwind the federal government by drastically reducing its expenditures. If we do not do it soon, our creditors will do it for us. It would be better if we do it on our terms rather than the rest of the world's terms.

[Jack]

Gary,
I'm with you all the way, so long as we start with the expenditures on wars of adventure (Iraq and Afghanistan), corporate welfare from ethanol to Yankee Stadium, and a tax system that soaks the middle class to the benefit of the rich. Can you agree to a government that supports only public roads, public schools and public health and general safety? How about higher education? I'd like to limit government spending to what I think is of value to the people. How about you?

[Gary]

Jack,
I think you're on the right track.

[LindaMBeale]

Gary,
strange that you pick a post about the estate tax to argue for dismantling the federal government. Obviously, unless we DO dismantle the federal government, we need to try to pay for it. And if we want to pay for it in fair ways that also support, in small or large ways, the kind of society that we think the US should be, we will retain an estate tax--ideally, one that has some real bite.

As for dismantling government, I can't go along with your proposal. I'd like to see the government do more of the things I want it to do that I believe further democracy, and less of the things that I think are harmful (less warmaking, more educating, etc.). So I would be very supportive of systematically reducing military expenditures and systematically increasing education, basic research, and public transportation, and clean air-clean water-clean soil expenditures. Yes, we need to deal with the deficit at some point fairly soon. But right now we need to get ourselves straightened out economically, and we need to redress the imbalance in a very unequal society. The estate tax is a just fine way to work on both of those latter two items.

[LindaMBeale]

Jack
Yes, the Dems are better, but not better enough! And too many of them did vote for the Bush tax cuts!

[Charles C.]

My parents were under the $650,000 exemption amount. I've been curiously talking some estate planning courses just to see how the rich and famous live, and how they worm their way out of taxes, marital deductions, ILIT's, QPERTS. The planner/lawyer schemed-out in a few hours how to shelter an entire 20 million to 100 million estate from tax. Can you say: "Dynasty", oooooh, my! Lets set up a dynasty for these 5,500 famlies per year. Yes, that is the number per year that have an estate that surpass the exemption. 5,500 very well heeled, very special elite people with very powerful political connections. Bleeech! So, I am with you. Look back and see how these fabulous estates were accumulated in the first place. Wall Steet theft and graft, gazillionaire commodity manipulators, robber barron oil company CEO's, Hedge fund carried interests... point being, this money was stolen and illicitly obtained in the first place, - Ma and Pa Kettle didn't squirill it away from their local plumbing business, and now some are gagging because they and Grover Norquist want to drown my Country in a bath tub so a few can return us back to feudalism?

Yeah,... well that said Linda, as you know, the $3.5mm is already baked in. Rangel is just a figurehead (like Dubya Bush was). And face this, when these thugs (the Rethuglicans) get back in control, and they will the way Nobama is wavering, they will jump right back on an unlimited estate exemption. $20 trillion dollar debt - who cares, one day it will all be defaulted anyway. Very sad :(

[Mike]

Linda,

Interesting article in todays Wall Street Journal "IRS to Scrutinize the Wealthy". Finally someone is getting the point. Higher taxes are not the answer, better enforcement is. Get rid of all the loop holes and tax fairly. Higher taxes hurt everyone. Estate taxes are the governments way to get into your pocket a second time. A better solution to estate taxation would be to lock in values and pay only on appreciation, since the rest has already been taxed once. It is sad to see our country so divided!

[LindaMBeale]

Well, Mike, I agree that enforcement is important--without enforcement, too many people will become tax cheats. One academic study claims that there is substantial understatement of basis by the wealthy, leading to even less tax on capital gains than there should be, even with the preferential rates.

However, enforcement is not the only right solution, and I don't agree at all with the rest of the views you've expressed. Especially when your facts are wrong.

The tax code is currently heavily weighted in favor of the superrich--in that many of the provisions for "tax expenditures" are ones that are taken advantage of primarily by the rich and/or of substantially more value to the rich. The estate tax is one way that we should redress that imbalance.

It is not true, by the way, that "the rest has already been taxed once." In fact, in many cases, the rest has NEVER been taxed, because family owned corporate stock is passed from generation to generation, getting a step-up in basis to fair market value each time. That way, the wealthy can sell a little stock WITH NO GAIN, and then can continue amassing a (largely UNTAXED) fortune.

Note that the wealthy who own most of the financial assets are also the ones able to take advantage of the charitable contribution deduction for value that hasn't been taxed--contribute stock to a charity, deduct the VALUE not the BASIS, and then use that deduction to eliminate even more tax on the rest of your income.

It's a good life, if you are among the super-rich, for sure, and made even nicer by all the provisions in the Code that favor the wealthy. We should not aggravate that problem by doing what the right-wing wants to weaken the estate tax. Let it go back to what it was before Bush started messing with it, or even better, increase the rate, so that we actually do something to stop the building of family dynasties based on the accumulation of wealth under some of the giveaway provisions (like the 'carried interest' wealth that allows hedge fund managers to earn their compensation at preferential rates, while the line worker continues to pay at ordinary income rates).

[Mike]

Linda,

The purpose of the estate tax reduction under the so called "right-wing" was to also help the middle income americans who found themselves having their legacy sold to pay estate taxes because they actually worked for a living and saved their money. Their homes appreciated in value and their retirement accounts grew as the economy allowed. Because they were frugal hard working individuals who prospered, their legacy to their heirs was raided by the government. Take a California 2 bedroom home that cost $200,000 and is valued at $1,000,000? Should they have to pay estate taxes? The farmer whose land value is worth far more than the farm value, should they have to sell the farm upon their death? The purpose of the estate tax repeal was to protect these folks, your solution is to throw away the baby with the bath water.

If your concern is the appreciated value, why not lock in the value at a given date and pay on the appreciation? Allow exemptions for closely held business, farms and homes. The wealthy are not the largest holders of financial assets, the retirement plans of hard working middle america is!

There is an interesting cartoon production from 1948 on youtube called "Make Mine Freedom (1948)". We can learn a lot from the past if we only pay attention.