In 2001, Washington passed an odd "repeal" of the "billionaire's tax" on mega estates. Today, our Senators and Representatives in Washington are engaged in a debate about whether to let the estate tax gimmick they passed become a permanent boondoggle for the super-rich.
Before Washington's 2001 largess for the super rich, the first $675,000 of an estate was already excluded from tax! The maximum tax rate on estates over that amount was 55%, but there were also a number of exceptions and deductions available to reduce the estate tax. The average effective tax rate--the rate actually paid on the entire estate for those few super-wealthy estates that ultimately had to pay estate taxes--topped out very low, at less than 20%. The estate tax rules also permitted farmers, whose estates might be land rich but cash poor, up to fourteen years over which to pay whatever estate tax might be due on the value above the exclusion amount. In other words, ordinary Americans were already immune to the estate tax, and nearly all family farms and small family businesses were already exempt, despite the scare-tactics and crocodile tears for family farmers!
Here are some numbers. Each year, there are about 2,500,000 adult deaths in the United States. In 2000 (before any of the Bush tax cuts), fewer than 125,000 of those adults who died had estates large enough to have to pay any estate tax at all. In 2001, only about 50,000 owed any tax. That means only 2% of estates owed any tax at all. And those few estates that did pay some tax in 2001 were much larger than the estates of most ordinary hard-working Americans. The average value of estates that had to pan an estate tax was $2.7 million. (That's the value after taking into account the hefty valuation discounts that are permitted for interests in private corporations and partnerships for purposes of the estate taxes, so the value of most estates that were actually subject to estate tax would be considerably higher than $2.7 million.)
But Congress wanted to let the super-rich pass those inheritances tax-free to their heirs who generally do nothing to earn the money yet receive enormous advantages--including invaluable political access--from inheriting it tax-free. There was lots of talk about tax-free inheritances creating economic growth that would trickle down to ordinary Americans somewhere down the line, because the super-wealthy would have even more money to invest. Nobody mentioned that they are just as likely (or more likely) to invest in outsourcing companies in India and Bangalore as to invest in job-creating opportunities in the U.S. There was even more misinformation downplaying the way this tax cut exclusively for the super-rich would add to the huge deficit and debt that will saddle coming generations of Americans. Repealers also claimed the billionaire tax was unfair because the billionaires’ wealth had already been taxed when it was earned. But of course that simply is not so in many cases where the estate tax applies. Wealthy elderly taxpayers (especially those who inherited their wealth) avoid tax by not selling their appreciated stock during their lifetimes, so if it passes to their heirs at their deaths without a tax, it has escaped tax altogether on their watch. No one ever pays any tax at all on much of the value of appreciated stock that is passed from generation to generation, though that value, even unspent, provides coveted access and accolades like a magical charm! Those pushing repeal also claimed that families lost their family farms because of the federal estate tax, but that turned out to be just more exaggeration--the exclusion levels and special installment payment possibilities ensure that families can keep operating their farms after one generation dies. Repealers also complained that the estate tax drove the wealthy into expensive estate-planning. What they didn't say was that those costly and inefficient avoidance techniques could easily be eliminated by simple Congressional action to undo the effectiveness of the numerous devices used by the wealthy to avoid tax—such as certain trusts and family partnerships, full-value deductions for charitable contributions of assets with untaxed appreciation, or fancy derivatives that function like a constructive sale of the underlying assets.
Congress instead passed a huge tax cut for the super-rich. People who have lots of investments fared much better than ordinary Americans: rates on capital gains are slated to go to 0% in some cases before the decade is over, and earnings on stocks (like Bill Gates' $3 billion dividend from Microsoft) are treated preferentially like capital gains instead of being taxed at the higher ordinary rates applicable to wages. Using a gimmick to get people on board the bill, Congress phased out the estate tax through gradual rate reductions and increases in the tax-free exclusion: the tax decreases until there’s no estate tax at all for one year at the end of the decade, but then it springs back into existence at the original levels thereafter.
The repeal-and-spring-back gimmick, coupled with other similar sunset provisions, let Congress pretend that the tax cuts didn't create a gaping hole in the federal budget. It was just a smoke and mirrors trick. The budget was in surplus when this administration took office, but is now in deep deficit territory, in large part because of the injudicious tax cuts and the escalating $2 billion/week costs of Bush's war in Iraq.
In spite of the worrisome Federal budget deficits and high debt (much owned by foreign countries), Republicans have explicitly stated their intent to make estate tax repeal permanent and pass even further cuts favoring the type of income enjoyed by the super-wealthy. The House has acted on its estate tax plan, passing a bill this year for the fourth year in a row that would permanently repeal the billionaires’ tax. The cost of this favoritism for the super-rich? It's been estimated to be a whopping $290 billion for just the first 5 years (2011-2015) or about $1 trillion for 2012-2021, including the increased interest on federal debt! While the heirs of the wealthy receive their unearned income tax free, ordinary Americans will pay the cost through lost services (such as less funding for health care and unemployment assistance), increased taxes, and/or more federal borrowing (to be repaid by even higher taxes in the future). If Congress continues on its present path, those new taxes will be leveled on wages earned by ordinary Americans who work for a living and not at all on capital gains earned by the super-rich who live mostly off investments.
It would be easy to make simple changes to the estate tax to be sure that even the upper-middle-class are little affected. The New York Times editorial board suggests an "ample exemption of up to $2 million per person" and a maximum rate of 45%.
Repealing the billionaire’s estate tax just doesn’t make sense. It damages democratic institutions by increasing the already huge gap between the super-wealthy and the rest of us. And at a time of gaping budget deficits, enormous debt burdens, and the drains on our resources from vastly increased military spending, repeal of the estate tax is simply unconscionable. Remember this: the tax revenues from taxing just the largest 0.3% of estates (that's a very few estates) would offset a considerable portion of what Bush claims is the shortfall in the Social Security trust fund over the next 75 years (more on that in a later blog).
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