Capital Exchange is a new blog featuring debate among some of Washington’s smartest budget and policy experts. –Eric Pianin, Washington Editor and Moderator
Should we cut taxes even more for those Americans who are lucky enough to inherit very large estates from their deceased loved ones? Believe it or not, some lawmakers think so. I hope they don’t succeed.
Back in 2001, President Bush and Congress enacted legislation to gradually reduce the federal estate tax, which applies to cash, stock, real estate, and other property that’s passed down after a death. Under that law, the per-person tax exemption for inherited estates rose from $1 million to $3.5 million by 2009, and the tax on estate values above the exemption level fell from 55 percent to 45 percent. Starting this year, the tax disappeared altogether. But, due to an oddity in the law that was driven by budget considerations, the tax will return in 2011 to the parameters in place before the 2001 changes.
No one had expected the White House and Congress to let the estate tax expire this year. Surely, tax insiders said, the two branches would devise a permanent solution to avoid the rollercoaster of rates and exemptions that would occur from 2009 to 2011. As it turned out, though, nobody could craft a solution that could garner the necessary 60 votes in the Senate. So, here we sit – with no estate tax in place today but the prospect of a back-to-the-future estate tax starting in January.
Where do we go from here? Well, the president proposes to make the 2009 estate tax parameters permanent, and plenty of lawmakers would do the same. In fact, the House voted to do that late last year. That’s generous to say the least – especially when you consider that (1) an estate tax at that level affects fewer than the top three of every 1,000 estates in America, and (2) the most well-to-do Americans have enjoyed soaring incomes in recent years while incomes for everyone else have largely stagnated.
Economists Thomas Piketty and Emmanuel Saez, who write often about income distribution based on IRS data, reported that, based on the latest data, the top 1 percent of Americans enjoyed two-thirds of all income gains in America from 2002 and 2007. By 2007, the top 1 percent held their greatest share of national income since 1928. Meanwhile, the Census Bureau reported that, for 2008, median household income reached its lowest level in inflation-adjusted dollars, and poverty its highest level, since 1997. Due to the recent recession, the census’s next report is expected to show further income deterioration.
Soaring incomes at the top and stagnant incomes elsewhere, however, do not faze everyone on Capitol Hill, where two senators have made further reductions in the estate tax their holy grail. Arkansas Democrat Blanche Lincoln and Arizona Republican Jon Kyl continue pressing to raise the exempted amount to $5 million per person and to cut the tax rate to 35 percent. That would cost the federal government, already swimming in red ink, another $150 billion or so over 10 years compared to making the 2009 parameters permanent.
Lincoln, Kyl, and other estate tax critics say it hurts small businesses and farmers. That’s an appealing political message. Small businesses and farmers are far more sympathetic groups than rich Americans, particularly at a time of economic stress and rising income inequality. But, as explained above, the claims are gross exaggerations at best, outright falsehoods at worst. At its 2009 parameters, the estate tax is simply irrelevant to the vast majority of small businesses and farmers.
The White House and Congress have real challenges ahead. Providing a more generous write-off for the heirs of America’s largest estates is not one of them. They don’t need it, and we can’t afford it.
Lawrence J. Haas is former Communications Director to Vice President Gore and, before that, to the White House Office of Management and Budget. He's now a public affairs consultant who writes widely about foreign and domestic affairs, including fiscal policy.